Federal Reserve "third-in-command": The U.S. labor market may further slow down, supporting continued interest rate cuts within the year

According to the Zhitong Finance APP, John Williams, the "third-in-command" of the Federal Reserve and President of the New York Federal Reserve, stated in an exclusive interview on Thursday that he supports further interest rate cuts this year, given the potential for a slowdown in the U.S. labor market. However, he also emphasized that the current cooling of employment does not mean the economy is on the verge of recession. Williams also serves as Vice Chair of the Federal Open Market Committee (FOMC) and has permanent voting rights like the Federal Reserve governors.

Williams pointed out, "I personally believe there will indeed be further interest rate cuts this year, but the specific magnitude will depend on future data." When asked if he anticipates two more cuts of 25 basis points each, he stated that if future data aligns with his expectations—namely, inflation slightly rising to around 3% and a moderate increase in the unemployment rate—then monetary policy should adjust in that direction.

He emphasized that the Federal Reserve's goal is to curb inflation, which remains above the 2% target, while avoiding excessive shocks to the labor market. The current monetary policy stance is "slightly restrictive," which helps to push inflation back to 2% sustainably. However, he warned that allowing inflation to significantly exceed targets would undermine the economy and the central bank's credibility. "We must proceed with caution, trying to avoid a sharp cooling of the labor market while controlling inflation."

The Federal Reserve announced a 25 basis point rate cut during its meeting on September 16-17, with Chair Jerome Powell stating that this move would maintain a tightening policy to curb inflation while providing some support to the weak labor market. According to the meeting minutes, most officials believed that the rising risks to employment were sufficient to support a rate cut, but they still worried about the persistence of high inflation. The market currently expects the Federal Reserve to make another slight rate cut during its meeting on October 28-29.

Additionally, Williams mentioned in the interview that President Trump's tariff measures have had a "lower-than-expected" impact on prices. He estimated that tariffs have only raised the overall price level by 0.25 to 0.5 percentage points and noted that "core inflation is gradually falling back to around 2%" without any second-round effects. He also stated that changes in the economic structure have weakened upward pressure on inflation, while rising employment risks have somewhat offset the momentum for price increases.

Finally, Williams emphasized that the independence of the Federal Reserve is crucial. In the face of political pressure from the White House to implement deep rate cuts and attempts to replace Federal Reserve Governor Lael Brainard, he stated, "I care deeply about the independence of the Federal Reserve."