The President of the Federal Reserve Bank of New York, John Williams, said on Friday that a better economic balance had paved the way for interest rate cuts, with action entirely determined by economic performance.
"With the economy now in balance and inflation on track to reach 2 percent, it is now appropriate to reduce the level of restraint in policy by lowering the target range for the Federal Reserve's funds rate," Williams said in a speech prepared to be delivered at the Council on Foreign Relations in New York.
"Monetary policy may be moved to a more neutral setting over time depending on data developments, projections, and risks to the achievement of objectives," he added.
Williams spoke shortly after the August jobs data was released. Movements in the unemployment rate have been closely watched following its recent slow rise and an unexpected increase in July, which has raised concerns that the US economy's strong hiring pace may be slowing.
In his speech, Williams said the increase in the unemployment rate largely reflected the decline from overheating conditions, and that it remained at historically low levels. He expects the unemployment rate to end around 4.25% this year and then drop back to a long-term level of around 3.75%.
The state of the job market has become increasingly important for the Federal Reserve in an environment where inflationary pressures are easing, enough to make room for a rate cut that will begin in September. In late August, Fed Chairman Jerome Powell said, "the time has come to adjust policy," adding "the direction of movement is clear, and the timing and rate of tapering will depend on the data received, the evolving outlook, and the balance of risks."
In recent weeks, Fed officials have declined to provide firm guidance on the size of the tapering that will almost certainly be announced at the Federal Open Market Committee meeting scheduled for September 17-18. Financial markets generally expect a quarter percentage point reduction in the Federal Reserve's target funds rate, which is currently in the 5.25% to 5.5% range, with more reductions to follow.
Several Fed officials have indicated they are looking at a gradual rate reduction path but have not commented much on what might happen at any particular meeting.
Williams also said in his speech that the decreasing inflationary pressure is expected to cause inflation to decrease to an increase of 2.25% this year and slightly above 2% next year.
