An influential voice at the Federal Reserve on Friday revived hopes that the US central bank will cut interest rates again next month, pushing back against hawkish sentiment from regional members.
Speaking at an event in Chile, New York Fed president John Williams said that he sees “room for a further adjustment in the near term”.
Investors quickly seized on Mr Williams’s comments to increase their bets on a December cut. About three quarters of traders now anticipate the Fed will reduce the target federal funds rate to a range of 3.50-3.75 per cent next month, compared to roughly 40 per cent on Thursday.
US stocks rebounded in a topsy-turvy day of trading on Friday, following Mr Williams’s remarks, as Wall Street looked to shrug off fears of an AI stock bubble. The Dow Jones was last trading 700 points – or 1.5 per cent higher – as of 9.30pm GST / 12.30pm ET. The S&P 500 and Nasdaq Composite rose 1.2 and 1 per cent, respectively.
The yield on the two-year Treasury, which is sensitive to Fed policy, dropped more than two basis points to 3.537 per cent.
Mr Williams said in his prepared remarks that the labour market appeared to be softening. And while progress on bringing inflation back to the Fed’s 2 per cent goal has “temporarily stalled”, the New York Fed president said he anticipated price pressures as a result of tariffs to eventually ease.
His remarks underscore the current dilemma the Fed faces: to either tackle stubborn inflation or shore up what is perceived as a weakening labour market. Unlike other central banks, the Fed has a dual mandate to achieve price stability and full employment. The Fed’s primary tool to address these – interest rates – is not equipped to handle both at once.
The Federal Open Market Committee consists of 12 voting members: the seven Fed governors, the New York Fed president and four regional Fed presidents who serve rotating one-year terms. Steered by the Fed chair, they set the range for US interest rates eight times a year, and their decisions are typically followed the UAE Central Bank because of the dollar peg.
Mr Williams holds a permanent vote on the FOMC and is considered one of the most influential members on the committee because of the New York branch’s close proximity to Wall Street. Located less than a kilometre away from the New York Stock Exchange, the New York Fed is a major player in the global financial system and serves as a global custodian for gold.
Mr Williams’s views pit him against a growing hawkish contingent among the regional Fed presidents who remain adamant on keeping rates steady. Among those is Boston Fed President Susan Collins, a voting member on the FOMC this year, who told CNBC on Thursday she was “hesitant” about further rate cuts and sees current policy as “very appropriate right now” to keep inflation at bay.
Meanwhile, a separate camp of Trump-appointed Fed governors have called for further rate cuts, pointing to weakness in the labour market. Stephen Miran, a top economic ally of President Donald Trump who is currently on leave from the While House while serving on the board in a temporary capacity, remains an outlier in calling for steeper cuts than his colleagues.
Intensifying the lack of clarity the Fed currently faces is a lack of economic data because of an extended government shutdown that ended earlier this month. The 43-day shutdown, which ended earlier this month, has already caused delays in the publication of various economic reports.
On Friday, the government said it will not publish a consumer inflation report for October. This followed a prior announcement from the Bureau of Labour Statistics earlier this week that it will not release a jobs report for October because survey data – including the nation’s unemployment rate – could not be collected during the shutdown.
One delayed report from September released earlier this week provided a mixed bag for the Fed, as job gains exceeded expectations while the unemployment rate ticked up to 4.4 per cent.