New York Fed President Williams sees room for ‘further adjustment’ to rates

New York Federal Reserve President John Williams said Friday that he expects the central bank to cut its key interest rate from here because labor market weakness poses a greater economic threat than higher inflation.

As divisions grow within the central bank over the future of rates, Williams has sided with doves who still see policy as a bit restrictive when it comes to economic growth.

“I view monetary policy as moderately restrictive, but slightly less than it was before our recent actions,” he said during a speech in Santiago, Chile. “Therefore, I still see room for further near-term adjustments to the target range of the federal funds rate to move the policy stance closer to the neutral range and thereby maintain the balance between achieving our two goals.”

Williams’ comments helped move financial markets in several ways.

Treasury yields fell sharply while stock market futures rose into positive territory.

At the same time, Fed fund futures pricing regarding the next Fed move also changed direction. Investors now see the odds of another quarter-point cut at the Federal Open Market Committee’s Dec. 9-10 meeting at over 64%, and the odds of no cuts at just 36%. This is about a complete reversal from where expectations were at the same time on Thursday.

Williams’ comments are significant as he is seen as part of a leadership troika that includes Chairman Jerome Powell and Vice President Philip Jefferson, who will speak at 8:45 a.m. ET on Friday. Powell has not spoken publicly since the FOMC meeting in late October, when the committee approved a quarter-point, or 25 basis-point, cut.

In comments to CNBC on Friday morning, Boston Fed President Collins struck a different tone from Williams and said he would be hesitant to support further cuts, noting the threat that inflation still exists. Collins, this year’s FOMC voter, said last week he would have a “high bar” to support further cuts.

“I think a mildly restrictive policy is very appropriate right now. And, you know, I can’t wait to think about what the next policy move should be, and that makes me hesitant,” he said during the “Squawk Box” interview.

Collins said he sees “weakness” particularly among lower-income people “and that actually appears to be tied to high price levels and ongoing inflation, inflation that has been high for about five years.” [and] There is a risk of permanence.”

Jefferson and Dallas Fed President Lorie Logan will also make statements Friday morning.

Fed sentiment is split between officials who see the policy as still somewhat restrictive, meaning there is more room to cut rates without raising inflation, and officials who see it as not restrictive, further mitigating the threat to higher prices, especially in an era of significantly higher tariffs on U.S. imports.

“My assessment is that the downside risks to employment increase as the labor market cools, while the upside risks to inflation diminish somewhat,” Williams said. “Headline inflation remains on a downward trend as there is no evidence of second-round effects from tariffs.”

Williams, like many other Fed officials, noted that progress in inflation has “stalled” due to the impact of tariffs and other factors. However, he noted that long-term expectations are still under control, giving the Fed latitude to return inflation to its target by 2027.