Stocks, Bonds Rise as Fed’s Williams Signals Cut

Michael Ball, Bloomberg News Macro Strategist, discusses this week's market downturn and comeback.

Wall Street traders reeling from a recent bout of wild stock gyrations drove the market higher as bond yields fell after a Federal Reserve official suggested that another interest-rate cut remains a possibility.

While the S&P 500 is still on track for its worst week since May, equities bounced on Friday as Fed Bank of New York President John Williams said he sees room for the central bank to ease policy again in the near term as the labor market softens.

Williams’ remarks spurred a repricing in money markets, which are now see an over 60% probability of a reduction in borrowing costs next month. Those wagers kept pushing Treasuries higher, with the bond market also getting a boost this week amid heightened market swings.

“There is some ambiguity in the phrase “near term,” but its most obvious reading is at the next meeting,” said Krishna Guha at Evercore. “We tentatively interpret Williams as indicating Jerome Powell is minded to go for the cut, knowing that the next two labor market reports are likely to be weak anyway with unemployment 4.5% or higher.”

Despite the rebound in equities, sentiment remains fragile. The crypto world continued to get hit, with Bitcoin now set for its worst monthly performance since a string of corporate collapses rocked the wider sector in 2022.

Over $3.1 trillion of notional options exposure will expire Friday, including $1.7 trillion of S&P 500 options and $725 billion notional of single stock options, according to Goldman Sachs Group Inc. data. That would be the largest expiring notional open interest is for any November.

Federal Reserve Bank of New York President John Williams said he sees room to lower interest rates again in the near term as the labor market softens, reviving investor expectations for a December rate cut.

In the text of a speech he delivered Friday in Santiago, Chile, Williams said downside risks to employment have increased while upside risks to inflation have eased. Investors boosted the odds of a rate cut at the Fed’s Dec. 9-10 policy meeting to around 70% after his comments, according to pricing in futures contracts, up from around 35% earlier.

“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” he said. “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, thereby maintaining the balance between the achievement of our two goals.”

The remarks by Williams suggest another rate cut this year remains a possibility as Fed Chair Jerome Powell tries to forge a consensus among a fractured group of policymakers in time for their upcoming gathering in Washington.

The president of the New York Fed has historically been closely aligned with the Fed’s chair. Powell, who last spoke at a press conference following the Fed’s Oct. 29 decision, isn’t scheduled to speak publicly again before the next meeting.

“At a minimum Williams’s intervention signals that the Fed leadership has not given up on a cut,” Evercore ISI economists led by Krishna Guha said in a note. “But we think it is reasonable – though not certain – to read it as more than that.”

Following a second consecutive rate cut in October, a number of officials voiced their opposition to, or uncertainty over, supporting a third move in December. Two policymakers continued that trend Friday.

“With two rate cuts now in place, I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly,” Dallas Fed President Lorie Logan said at an event in Zurich.

Speaking in an interview with Bloomberg’s Odd Lots podcast that was recorded Wednesday and released Friday, Boston Fed President Susan Collins signaled that holding rates steady would be “appropriate for now.”

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