Williams' comments boost odds of a Fed cut, though policy hawks remain adamant

By Howard Schneider and Ann Saphir WASHINGTON (Reuters) -Comments from a top U.S. Federal Reserve official on Friday that interest rates can fall "in the near term" boosted the likelihood of a rate cut at the Fed's December 9-10 meeting, even as other policymakers insisted borrowing costs should remain steady for now to ensure inflation declines in coming months. New York Fed President John Williams, a permanent voter on rate policy and vice chair of the rate-setting Federal Open Market Committee, said at a conference at the Central Bank of Chile that U.S. interest rates could fall without putting the Fed's inflation goal at risk, while helping guard against a slide in the job market. "I view monetary policy as being modestly restrictive…Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral," Williams said in new remarks that led investors to put a nearly 60% chance of a quarter-point cut at the U.S. central bank's December meeting, reversing what had been strong conviction that the Fed would pause due to concerns about inflation. U.S. Treasury yields dropped on the prospect of a lower Fed benchmark rate, helped by Williams' comments and data on Thursday showing a rise in the unemployment rate to 4.4% in September from 4.3% the prior month. Williams said the job market appears to be softening, and compared the September jobless rate to the pre-pandemic years "when the labor market was not overheated." Though progress on inflation has "temporarily stalled" with prices rising at a rate well above the Fed's 2% target, he said he expected price pressures to ease as the impact of tariffs passes through the economy. The Fed needs to reach its inflation target "without creating undue risks to our maximum employment goal," Williams said.  His comments come amid debate about whether the Fed should cut rates in December, with some other regional bank presidents drawing a hard line against further reductions until it is clear that inflation will drop to the Fed's 2% target from its current, still-elevated level.  Federal Reserve Bank of Boston President Susan Collins said in a CNBC interview on Friday that she thinks monetary policy is in the right place given the economy's resilience, reaffirming a view that had helped push market sentiment away from bets on a Fed cut. Collins, a voter on Fed policy this year and therefore able to dissent against FOMC decisions, said she was "hesitant" about further rate cuts, with the central bank's benchmark policy rate currently set in a 3.75% to 4% range that she feels is only "mildly restrictive" and "very appropriate right now" to keep some downward pressure on inflation. Dallas Federal Reserve President Lorie Logan, meanwhile, on Friday called for leaving the policy rate on hold "for a time" while the central bank assesses the impact of monetary policy on the economy. Logan does not currently hold one of the four voting seats that rotate annually among the 11 reserve bank presidents other than Williams,  but will have a voting role next year. In remarks prepared for delivery in Zurich, she repeated her view that the Fed's October interest-rate cut was not warranted with inflation too high and the labor market roughly balanced. "In the absence of clear evidence that justifies further easing, holding rates steady for a time would allow the FOMC to better assess the degree of restriction from current policy," she said. The debate over a December rate cut is being carried out in the absence still of the core economic data the Fed typically relies on, with delays in the release of jobs and inflation data due to the recently ended government shutdown. Several members of the Washington-based Board of Governors, all appointees of President Donald Trump, have been the most vocal in advocating that rates should move lower, with inflation due to fall in their view and risks mounting to the job market. The current "hawks" by contrast are centered among presidents of the 12 regional reserve banks, quasi-private institutions overseen by local boards and created under the Federal Reserve Act to decentralize power as a further check on the influence of elected officials, and particularly the president, over monetary policy. That has raised the prospect of divided votes over coming rate moves. A quarter point cut at the Fed's October meeting, to the 3.75% to 4% range, prompted dissents in favor of both tighter and looser monetary policy, and the opinions since then among some officials have grown even firmer. Fed Governor Stephen Miran, who has dissented twice in favor of larger half-point cuts and is expected to continue doing so, said that if the divisions grew sharp enough that his vote would make the difference he would change tactics. "I would absolutely vote for a 25-basis-point cut if my vote were the marginal vote, there's no question about that," Miran, currently on leave as a top economic advisor to Trump, said on Bloomberg Television. "To do otherwise would be to cause real harm to the economy for purposes of vanity and that's not who I am." (Reporting by Howard Schneider; Additional reporting by Ann Saphir and Michael Derby; Editing by Chizu Nomiyama and Andrea Ricci )

(The article has been published through a syndicated feed. Except for the headline, the content has been published verbatim. Liability lies with original publisher.)