Wheels in motion at the Fed | Federated Hermes Limited

The Federal Reserve’s focus isn’t confined to the policy rate. As it approaches upcoming decisions, the central bank is also monitoring the knock-on effects from winding down asset purchases and the broader implications for market liquidity and financial conditions.

Why the New York Fed president matters

Investors pay close attention to commentary from the entire roster of Federal Reserve leaders, but a few voices resonate more than others. The chair naturally tops the list. Close behind is the president of the New York Fed, a permanent voter on the Federal Open Market Committee (FOMC) and historically an influential figure in shaping policy and communicating the Fed’s thinking.

Signals from John Williams

Against this backdrop, remarks from John Williams, the New York Fed’s current president, drew considerable market attention. He indicated he would be inclined to support a rate cut at December’s policy meeting, framing the balance of risks in a way that favors easing.

Williams highlighted a softening labor market as a larger threat to the U.S. economy than lingering inflation pressures. Though the comments were delivered in a speech in Santiago, Chile, on 21 November, they echoed loudly across U.S. markets. Following his remarks, futures markets quickly recalibrated, shifting from roughly a one-in-three chance of a December cut to a strong majority expectation. We had already viewed a reduction as likely—taking the federal funds target range toward 3.50–3.75%—and those odds appeared to strengthen further after his speech.

Reading the labor market

The timing of Williams’ comments was notable. They came shortly after the release of the delayed September nonfarm payrolls report, which showed an increase of 119,000 jobs—an outcome initially interpreted as firmer than anticipated. Yet the broader picture softened upon closer inspection: prior months were revised down by a cumulative 33,000 jobs, the unemployment rate edged up from 4.3% to 4.4%, and several ancillary indicators suggested momentum in hiring and wage gains was ebbing.

These developments help explain why the Fed may judge labor-market risks as increasingly two-sided—or even tilted toward weakness. A slower pace of job creation, rising unemployment, and cooling wage growth can collectively reduce demand-driven inflation pressures, opening the door to policy easing without undermining the Fed’s broader price-stability mandate.

Beyond rates: the balance sheet and market plumbing

While headline attention centers on the policy rate, the Fed is also attuned to how its balance-sheet actions filter through financial markets. The gradual reduction of securities holdings—often described as tapering or runoff—affects bank reserves, money markets, and overall liquidity. The central bank will be watching for signs of strain, ensuring that the pace of runoff does not inadvertently tighten financial conditions more than intended.

This means policymakers are juggling two interconnected levers: the federal funds rate and the balance sheet. The former sets the broad stance of monetary policy; the latter influences the availability of liquidity and the smooth functioning of the financial system. If labor-market data continue to soften while inflation trends lower, a modest rate cut combined with careful balance-sheet management could be the route to sustaining growth and guarding against unnecessary tightening.

What to watch next

• Incoming labor data: payrolls, unemployment, and wage growth will shape the Fed’s assessment of slack and inflation risks.
• Inflation trajectory: continued moderation would reinforce the case for near-term easing.
• Market liquidity: indicators across money markets and bank reserves will inform the pace of balance-sheet runoff.

With the New York Fed president signaling openness to a December rate cut and labor metrics showing signs of cooling, the center of gravity at the Fed appears to be shifting. Markets have taken notice, and the path ahead likely hinges on whether the next rounds of data validate the view that growth can be supported without rekindling inflation pressures.