The mounting problems facing poorer Americans are leaving the world’s most important economy exposed to risks of a downturn, a top Federal Reserve official has warned, highlighting the “balancing act” facing central bankers as they consider whether to cut interest rates again in December.
John Williams, president of the New York Fed, said data and conversations with community leaders highlighted that many poorer households were facing an affordability crisis.
“There is quite a bit of evidence . . . that lower and moderate-income households are facing some constraints from an affordability point of view,” Williams told the Financial Times. “From the cost of living, the housing costs and basically many families living month to month.”
Meanwhile, wealthier Americans were benefiting from the stock market “booming near all-time highs”.
With the US jobs market cooling, Williams signalled that what he dubbed the “disaggregated” behaviour of US households could be a factor in determining whether or not he thinks the Fed should cut borrowing costs in December — a vote he described as a “balancing act”.
While US growth overall had proven much more resilient than many economists had anticipated and inflation remained above the Fed’s 2 per cent goal, the pain felt by more vulnerable households because of the high cost of living meant the US economy could be knocked off course.
“Something could happen that cuts into confidence, or consumer spending growth that we’re seeing at the aggregate level may not be as robust, if you will, as it would be otherwise, given that a lot of folks are really, again, living month to month,” said Williams, who is also vice-chair of the rate-setting Federal Open Market Committee.
Fed officials — including chair Jay Powell and influential governor Christopher Waller — have started to focus more on how a labour market which Williams described as lacking “a lot of strength and momentum” could affect the economic prospects of normal Americans.
Powell and Waller have noted strong consumer spending is being disproportionately driven by the highest earners.
The pain felt by poorer and middle-income American households is also affecting the political climate, propelling Zohran Mamdani to victory in the race for New York mayor, where he ran on a platform of lowering living costs.
The poor showing of candidates backed by US President Donald Trump in the city’s mayoral race and votes for the governorships of Virginia and New Jersey has also been linked to a crisis in affordability similar to that which plagued Joe Biden’s presidency.
The Fed has cut borrowing costs by a quarter-point at each of its past two policy votes because of evidence the US labour market was weakening.
Investors expected another move next month — up until late October when Powell said further cuts were far from a “foregone conclusion”.
“It’s really a balancing act,” the New York Fed president said in reference to the December vote. “These facts are fundamentally true — inflation is high, and it’s not showing signs of coming down right now. And at the same time, the economy is showing some resilience.”
While the US labour market was still “gradually cooling”, it was “not shifting more dramatically”. Unlike earlier in the year, “no one’s really talking about recession”, he said.
The US economy has performed better than many, including Williams, had feared. In April, he said Trump’s tariffs could drive inflation up as high as 4 per cent — and growth to “somewhat below 1 per cent”.
Much of the rebound in confidence has been down to gloom over trade tensions being replaced by optimism over a boom in artificial intelligence and AI-related investment.
Williams said projections that AI could substantially lift productivity growth were not “outlandish”, but reserved judgment on just how much impact he expected the technology to have.
While AI-related investments have spurred growth, soaring equity prices have sparked some concerns of a bubble.
“Is there going to be excessive investment? Are there going to be investments that company X succeeds or company Y doesn’t? Yes. But I think it’s happening because there’s something real going on, something fundamental going on,” he said. “And it doesn’t worry me, as long as it’s not highly leveraged, and a lot of it’s equity financed.”
At its October meeting, the Fed called time on its three-year quantitative tightening experiment — a policy which shrunk the central bank’s balance sheet by about $2tn — amid signs of funding strains in money markets.
Williams acknowledged funding pressures in the “past few weeks are definitely sending us pretty clear signals that the level of reserves have come down”.
However, he pushed back against some market calls to end QT ahead of the December 1 target set by the FOMC last week, saying allowing it to run through November “makes perfect sense”.
He also opposed Dallas Fed president Lorie Logan’s calls for the central bank to shift its benchmark interest rate from the federal funds target range to a rate more reflective of borrowing costs in repo markets.
“I’ve been on the FOMC a while now, so we’ve discussed this at length, I think, a few times, and we looked at it very carefully and thought about it carefully, and each time we have decided to stay with the federal funds rate as the policy rate,” he said.
The New York Fed president did not subscribe to Powell’s view that a lack of official economic data — the result of the continuing government shutdown — would make a cut less likely.
“We will get more information regardless of the state of the government shutdown,” Williams said. “We have developed over, I would say, over 100 years, a remarkable set of indicators and measures of this state of the US economy.”
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