Bets for a December interest rate cut by the US Federal Reserve have sharply increased on Friday after an optimistic speech by the New York Fed President John Williams.
Federal Reserve Bank of New York President John Williams indicated that the US central bank has scope to reduce interest rates again soon, citing a softening labor market.
Speaking Friday in Santiago, Chile, Williams stated in his prepared remarks that the risks to employment have increasingly leaned toward the downside, while the upward risks to inflation have become less severe.
Before his speech on Friday, bets for a December rate cut were languishing around 45%, according to the CME FedWatch Tool. However, after his comments, markets now see a 73% probability of the US central bank cutting rates next month.
Source: CME Group
“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” he said.
Therefore, I still see room for further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral, thereby maintaining the balance between the achievement of our two goals.
Doubts over rate cuts
Previously, expectations for a December rate cut have been lowered, primarily due to recent, cautious statements from most Federal Reserve officials.
Policymakers have consistently cautioned that inflation remains persistent and the labor market, although showing signs of cooling, is still robust enough to warrant a more patient strategy.
Philadelphia Fed President Anna Paulson stated on Friday that she is proceeding with caution toward the upcoming December policy decision.
While she characterised the September labor market report as “encouraging on balance,” Paulson indicated that her primary concern remains employment rather than inflation at the current juncture.
She affirmed that the rate cuts implemented to date have been appropriate, though each subsequent cut “raises the bar” for further monetary easing.
Given the current balance of upside risks to inflation and downside risks to employment, Paulson concluded that monetary policy needs to “walk a fine line.”
However, Commerzbank AG analyst Barbara Lambrecht believes that the probability of a rate cut next month is not over yet.
The meeting is scheduled for December 9-10, and one or two additional data points could still (retrospectively) be released in the meantime.
Mixed signals
While US jobs growth was stronger than anticipated in September, the unemployment rate also rose due to an increase in the number of workers entering the labor market seeking employment.
The US jobs report for September surpassed market expectations, despite being released after its initial target date of October 3.
The increase in non-farm payrolls, at 119,000 additions, was substantially stronger than the consensus forecast of 51,000.
While the overall outlook remained positive, the report also contained a significant detail: a downward revision of 33,000 jobs for the preceding two months.
Job gains were primarily concentrated in three key sectors—leisure and hospitality, government, and private education and healthcare services—which collectively generated almost all of the new positions.
Meanwhile, the unemployment rate rose to 4.4% from 4.3%.
This increase stems from a separate household survey, which indicates that, despite the labor force expanding by 470,000, only 251,000 people found jobs, leading to a net increase of 219,000 in unemployed individuals.
“My assessment is that the downside risks to employment have increased as the labor market has cooled, while the upside risks to inflation have lessened somewhat,” Williams said in his speech on Friday.
Underlying inflation continues to trend downward, absent any evidence of second-round effects emanating from tariffs.
Additionally, trade tariffs are estimated to have contributed between 0.5 and 0.75 percentage points to the current inflation rate, according to Williams.
However, he also stated that he does not anticipate these tariffs will cause any secondary or spillover effects on prices.
Diverging views
On the other hand, Boston Federal Reserve President Susan Collins expressed on Friday that she believes monetary policy is appropriately positioned given the economy’s current resilience.
Her remarks indicate continued doubt regarding the necessity for a further interest rate cut at the Federal Reserve’s upcoming monetary policy meeting next month.
Collins stated in a CNBC interview that the current high level of inflation makes “restrictive policy…very appropriate right now.”
She also indicated that the present economic situation causes her to feel “hesitant as I look forward to thinking about what the next policy move should be.”
She indicated that continuing the monetary policy near its current stance is necessary. This, she believes, will allow still-elevated inflation to eventually ease as the economic effects of tariff pressures dissipate.
Collins, a current voting member of the Federal Open Market Committee (FOMC), is among the Fed officials who are against cutting the central bank’s short-term borrowing rate at the upcoming December 9-10 meeting.
In response to a softening job market and persistent inflation levels that exceeded the 2% target, the Fed implemented interest rate cuts at both its mid-September and late October meetings.
These cuts, intended as an “insurance” measure, have set the federal funds rate target range at 3.75% to 4%, while simultaneously aiming to continue pushing inflation downward.
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