Fed's Third-in-Command Backs US Economy 'Soft Landing', Supports 25bps November Rate Cut

The unexpectedly strong US non-farm data further releases signals of an economic "soft landing," significantly weakening bets on a 50 basis point rate cut by the Federal Reserve in November. Wall Street has even begun discussing the topic of "no more rate cuts this year."

On October 8th, the "third in command" of the Federal Reserve—New York Fed Chairman Williams—also stated in an interview that the US economy is ready for a "soft landing" and supports the Fed in slowing down the pace of rate cuts, expecting only a 25 basis point cut in November.

At the same time, Williams does not want to "see the economy weaken" and hopes that the momentum of the economy and the labor market will continue, with the goal of adjusting interest rates to a "neutral" level.

The non-farm data for September significantly reversed current market expectations, proposing a new scenario for the US economy of "no landing" in addition to a "soft landing." This also dampened the buying frenzy of US Treasuries, with Treasury yields briefly breaking through 4%.

Federal Reserve's Third in Command: The Economy is Ready for a "Soft Landing"

Williams, who is the "third in command" of the Federal Reserve and has a permanent voting right in the FOMC, stated in an interview that the "very good" non-farm report for September confirmed the resilience of the economy and further pointed out:

The current monetary policy stance is indeed in a favorable position, with the hope of maintaining the strength of the economy and the labor market, as well as continuing to see inflation return to the 2% target level.

In Williams' view, a 50 basis point rate cut in September was "correct" at the time and remains so now. However, a 50 basis point rate cut is not a "guideline for future actions," and the Federal Reserve's decisions will depend on data, not following a "pre-set path," echoing the words of Federal Reserve Chairman Powell.Williams stated that the goal is to adjust interest rates to a "neutral" level that does not suppress demand "over time." At the same time, he does not wish to "see the economy weaken":

As Chairman Powell said, it makes sense to readjust policy to a level that remains restrictive and continues to put downward pressure on inflation, but this pressure should be much less than before. I do not want to see the economy weaken and hope that the strong momentum observed in the economy and labor market continues.

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Following aggressive rate cuts, Williams supports the Fed slowing down the pace of rate cuts subsequently, hinting at a 25 basis point cut in November. The latest "dot plot" of Fed officials' interest rate forecasts indicates that the Fed will cut rates by 25 basis points at each of the two remaining meetings this year, which is a "very good baseline scenario."

Regarding inflation, Williams expects inflation to approach the 2% target level by next year, but at the same time, he remains cautious about geopolitical conflicts in regions such as the Middle East. Oil price surges that could result from conflicts in the Middle East may reignite inflation concerns.

St. Louis Fed Chairman Mester also holds a similar view, believing that it is reasonable for the Fed to gradually and slowly cut rates subsequently, but it is necessary to be vigilant against over-relaxing monetary policy. The uncertainty of inflation could threaten the credibility of the Fed as well as future employment and economic activity.

Given the current economic conditions, the cost of the Fed's "too fast, too much" easing policy is greater than that of gradual easing.

Is there still talk of the U.S. economy "not landing"?

The non-farm data for September significantly reversed current market expectations. In addition to a "soft landing," a new scenario of the U.S. economy "not landing" has been proposed, and some people have even begun to worry about economic overheating rarely.The "no-landing" scenario refers to a situation where the US economy continues to grow, inflation heats up again, leaving the Federal Reserve with little room to cut interest rates. This scenario was overlooked by the bond market in recent months, as bond traders originally expected a slowdown in US economic growth and moderate inflation, with the Federal Reserve making significant interest rate cuts.

This has also dampened the buying frenzy for US Treasury bonds, with the yield on US Treasury bonds once breaking through 4%. On Monday, before the US stock market opened, the yield on the 10-year US Treasury bond once again stood above 4%, and the yield on the 2-year US Treasury bond broke through 4% for the first time since August.