Federal Reserve Bank of New York President John Williams said Friday morning that the accumulated data from the past several weeks has given him confidence that inflation is on a sustainable trajectory toward the Fed's 2% target and that the labor market is no longer overheating.

"With the economy now in equipoise and inflation on a path to 2%, it is now appropriate to dial down the degree of restrictiveness in the stance of policy by reducing the target range for the federal funds rate," Williams said during a speech at the Council on Foreign Relations. "This is the natural next step in executing our strategy to achieve our dual mandate goals."

The remarks came shortly after the U.S. Bureau of Labor Statistics released its latest employment report, which showed that the economy added 142,000 jobs last month — slightly below market expectations — and the unemployment rate remained roughly unchanged at 4.2%. 

Williams, who took the stage 15 minutes after the report was released, said he had not given the data a thorough reading, but the topline figures supported his outlook.

"The data today is, at a rough cut, consistent with what we've been seeing," he said, "a slowing economy and cooling off in the labor market."

After his speech, Williams said he did not have a view on whether the Fed's monetary policy arm, the Federal Open Market Committee, would reduce its target range for the federal funds rate by 25 or 50 basis points on Sept. 18. The benchmark rate has been between 5.25% and 5.5% since July 2023.

"That's not something I have a personal view on right now," Williams told reporters. "I think we've got to analyze all the data, not only the employment report, but look at other data that we've gotten and other data we will get and make a decision about what's the right decision to achieve our goals."

During the event, Williams also discussed the Fed's balance sheet reduction efforts, which have seen nearly $2 trillion worth of assets roll off the central bank's books since 2022. He said the process has been going "smoothly and as planned," noting that reserves — funds that banks use to settle transactions with one another — remain abundant, or well in excess of what the banking system needs. 

Williams said the Fed should be able to continue its balance sheet reduction efforts even as it lowers interest rates, despite the two processes seemingly being at odds with one another. He said the balance sheet adjustments are more impactful on long-term rates and have already been accounted for by market participants. 

He said there is a "substantive asymmetry" between the Fed's balance sheet reduction, also known as quantitative tightening, and the inverse, quantitative easing. He said the expansion of the Fed's balance sheet, as it occurred during the global financial crisis and again after the onset of the Covid-19 pandemic, were both aimed at mending dysfunctional markets, whereas the current trend is merely a normalization. These differences account for the Fed's disparate communication policies around the two processes.

"Yes, we do, I admit it, talk about QE when we're doing it to make sure people understand and be transparent about what we're trying to achieve … and act very strongly when we're doing it, knowing that as we reverse that and get back to normal, we're doing it in a way that … minimizes the disruption to the economy and the achievement of our goals," he said.

As the FOMC lowers rates, Williams said the Fed will track closely how its policies are absorbed by various parts of the economy. When the central bank was ramping up rates in 2022 and 2023, certain dynamics slowed transmission of its policy, he said, flagging the wave of mortgage refinancings in 2020 and 2021 that locked many homeowners in at ultra low rates. He said the Fed would watch carefully to see how that impacts the shift to easier policy.

"The stock of outstanding mortgages that were financed at very low rates clearly affected that one channel of monetary policy … typically, when you lower rates, like last cycle, a lot of people refinance and that channel boosts the economy," he said. "Monetary policy is clearly working, generally, as you would expect, but we do have to be very cognizant of some of these specific channels that may not be as powerful."

Williams was also asked to weigh in on the importance of the Fed's independence in setting monetary policy, a topic that has been closely examined in light of recent comments from former President Donald Trump. The Republican nominee for president said he should have a say in setting monetary policy.

Williams said the Fed's ability to influence interest rates free of political input has served the country well and been a model followed by the rest of the world. As long as the Fed continues to live up to its statutory mandates of stable prices and full employment, Williams said he is confident that its independence will be protected. The institution has taken steps in recent years to bolster that independence by making itself more open and accountable, he said.

"We've got to stay focused on achieving the job that we were given, and I think that to the extent that we're successful at that, and consistently successful, that's the best case I can make for independence," he said. "With that is also the important progress we made over the past 30 years about being very clear and transparent about our goals, how we set out to achieve our goals."