Top official suggests Fed is closer—but not yet ready—to cut

A top Federal Reserve official suggested an interest-rate cut could be warranted in the coming months—though not at the central bank’s meeting in two weeks—if a recent inflation slowdown continues.

Together with signs that U.S. labor-market conditions are cooling gradually, the last three months of inflation data are “getting us closer to a disinflationary trend that we’re looking for,” said New York Fed President John Williams in an interview Tuesday. “These are positive signs. I would like to see more data to gain further confidence inflation is moving sustainably to our 2% goal.”

The comments from Williams, who is vice chair of the Fed’s rate-setting committee and a top policy adviser to Chair Jerome Powell, suggest a rate cut is unlikely at the Fed’s July 30-31 meeting even if one or two officials push for it.

Instead, his remarks indicate the central bank could consider lowering its benchmark short-term interest rate when officials meet again in mid-September, provided there aren’t big economic surprises.

Data including last week’s consumer-price index for June show “a broad decline in inflation,” said Williams. He pushed back against concerns that bringing inflation all the way back to the Fed’s 2% goal would be more difficult than it had been so far to lower inflation from a high of 7% to the current level of around 2.5%.

“It is not really a story about a ‘last mile’ or some part that’s particularly sticky,” said Williams. Different inflation measures are “all moving in the right direction and doing that pretty consistently.”

The central bank lifted interest rates rapidly from near zero in 2022 to combat inflation that reached a 40-year high. Officials last raised their benchmark federal-funds rate in July 2023 to around 5.3%, the highest in more than two decades.

Williams said even if and when the Fed starts to lower rates, they would remain at a setting that still restrains economic activity.

“A restrictive stance of policy that we have in place is appropriate,” said Williams. “I do think there is a decision ahead of us at some point to decide, not to get out of a restrictive stance of policy, but to lower interest rates in a way that lessens how restrictive policy is.”

The fed-funds rate influences other borrowing costs throughout the economy, such as on mortgages, credit cards and business loans. Last week’s inflation report fueled stronger expectations of rate cuts by bond investors that are already providing some relief to potential borrowers. For example, the average 30-year mortgage rate has fallen to around 6.84% this week, down from 7.14% earlier this month, according to Mortgage News Daily.

Officials were surprised in the second half of 2023 by how rapidly price growth slowed despite strong spending and hiring. They shifted their attention toward how long to wait before cutting rates and through March, it seemed possible the Fed might cut them by June.

But prices were hotter in the first quarter, postponing cuts. Over the last three months, price growth has resumed a slowdown and the unemployment rate has crept higher, reducing concerns about a new source of price pressures. Some officials have warned that joblessness can rise faster once the labor market cools off.

Officials are trying to balance the risk of moving too slowly to reduce rates, which risks a sharper slowdown in hiring, with the risk of moving too soon, which could allow inflation to settle above the Fed’s target.

Williams said that while the labor market wasn’t weak, the process of bringing supply and demand into better balance isn’t something “we…need to see continue forever…because when we have that good balance, we’ll want to maintain that.”

While a September rate cut is widely anticipated by investors, the broad-based inflation slowdown in the June CPI report prompted some private-sector economists to wonder if the Fed could begin lowering rates at its meeting in two weeks. “Why wait?” said Jan Hatzius, chief economist at Goldman Sachs, in the headline of a research note distributed Monday.

“We’re actually going to learn a lot between July and September,” said Williams. Fed officials have said they would begin cutting interest rates if the labor market weakens unexpectedly or once they have confidence inflation is returning to 2%.

“We’ve had a few months of encouraging data. It’s the kind of data I would like to see more of in coming months…and if we get that…. I would find myself finding that greater confidence that inflation is moving sustainably to 2%,” said Williams.

Write to Nick Timiraos at Nick.Timiraos@wsj.com