The "Three Musketeers" of the Federal Reserve: Cutting interest rates now is appropriate!

New York Fed President Williams said, "Given the progress in declining inflation and cooling labor market, it is appropriate for the Fed to cut interest rates now."

Williams stated that the Fed has made "significant progress" in maintaining the dual goals of price stability and full employment, and the risks to achieving these two goals have now shifted to a "balanced" state.

In a prepared speech delivered at an event hosted by the Foreign Relations Association in New York on Friday, Williams said:

"With the economy now in a balanced state and inflation moving towards the 2% target, it is time to reduce the degree of policy constraints by lowering the federal funds rate target range."

The remarks came after the latest data showed U.S. employers added 142,000 jobs in August, revised up from 89,000 in July. The unemployment rate fell to 4.2%.

Nick Timiraos, a Wall Street Journal reporter known as the "Fed Whisperer," said that the nonfarm payrolls report could provide a clear signal about the magnitude of the Fed's first rate cut, whether it is 25 basis points or 50 basis points, with market pricing immediately rising to 90%. However, this nonfarm payrolls report did not address this issue well, and the market is currently "half-open" on pricing a 25 or 50 basis point cut. Overall nonfarm data has not deteriorated enough to shift the baseline expectation to a 50 basis point cut, but considering the revised data, it is not convincing enough to dispel speculation of a larger rate cut.

Interest rate futures traders have adjusted their previous bets, now seeing a higher probability of a 25 basis point rate cut by the Fed in September than a 50 basis point cut.

The Fed is expected to begin lowering its key rate from a 20-year high at the policy meeting on September 17-18. Fed Chairman Powell explicitly stated last month that the Fed is not seeking nor welcoming further cooling of the labor market.

Officials have been emphasizing in recent weeks that after years of focusing on inflation, they are closely monitoring the employment situation. Meanwhile, price pressures continue to fade.

The New York Fed President expressed confidence in inflation continuing to move towards the Fed's 2% target, and added that the labor market is unlikely to be a source of inflation pressure in the future.

Williams said, "The risks to our two goals are now in a better balance, and policy needs to adjust to reflect that balance." He described the downward trend in inflation as a broad and clear trend in the data.

Williams stated that he expects the Fed's preferred inflation gauge - the PCE price index - to fall to around 2.25% this year and approach 2% next year.

With a Fed rate cut this month almost certain, a key question the Fed faces is how large the rate cut might be and the pace of rate cuts thereafter. Although Williams did not disclose the magnitude of the first rate cut by the Federal Reserve, he indicated that officials could gradually shift policy towards neutrality over time, a position aimed at neither promoting nor restricting economic activity, "depending on the evolution of data, outlook, and risks to achieving our goals."

Powell also stated last month that "the timing and pace of rate cuts will depend on the latest data, evolving outlook, and risk balance."