Federal Reserve Board Governor Christopher Waller poses before a speech at the San Francisco Fed, in San Francisco, California, U.S., March 31, 2023.
Ann Saphir | Reuters
Federal Reserve Governor Christopher Waller suggested on Wednesday that interest rate cuts are ahead as long as there are no big surprises on inflation and employment.
“I believe the current data is consistent with a soft tapering and I will be looking for data over the next couple of months to support that view,” Waller said in comments on a program at the Kansas City Fed. “So while I don’t believe we’ve reached our final destination, I do believe we’re getting closer to the time when a policy rate cut is warranted.”
Echoing statements from other policymakers, Waller’s sentiments point to an unlikely rate cut when the Federal Open Market Committee meets later this month, but a stronger likelihood of a move in September.
Central bankers have been made more optimistic by data in recent months that have shown inflation easing after a surprisingly higher move for the first three months of 2024.
Waller outlined three possible scenarios in the coming days: One, in which inflation data turns even more positive and justifies a rate cut in the “not too distant future”; a second in which data fluctuate but still point to moderation; and a third in which inflation becomes higher and forces the Fed into a tighter policy stance.
Of the three, he considers the third scenario of unexpectedly stronger inflation to be the least likely.
“Given that I believe the first two scenarios have the highest probability of happening, I believe the time to cut the policy rate is drawing near,” Waller said.
Waller’s comments on Wednesday are particularly significant because he has been among the most dovish members of the FOMC this year, or those who have advocated for tighter monetary policy as fears escalated that inflation was proving more durable than expected. .
In May, Waller told CNBC that he expected the cuts to be “a few months away” as he waited for more convincing data that inflation was pulling back. His speech on Wednesday indicated that the threshold is close to being met.
For one, he said the labor market “is in a sweet spot” in which payrolls are expanding while wage gains are cooling. At the same time, the consumer price index fell 0.1% in June, while the 3.3% annual rate for core prices was the lowest since April 2021.
“After the disappointing data for early 2024, we now have several months of data that I see as more consistent with the steady progress we saw last year in reducing inflation and also in line with the FOMC’s target for price stability”, he said. “Evidence is mounting that the first-quarter inflation data may have been an aberration and that the effects of tighter monetary policy have corrected high inflation.”
The comments are also consistent with what New York Fed President John Williams told the Wall Street Journal in an interview published Wednesday. Williams noted that the inflation data is “all moving in the right direction and doing so quite steadily” and “is moving us closer to a disinflationary trend that we are looking for.”
Markets are again pricing in a more accommodative Fed.
Traders in the Fed funds futures market are pricing in an initial quarter-percent rate cut in September, followed by at least one more before the end of the year, according to CME Group’s FedWatch measure.
Fed funds futures currently imply a year-end rate of 4.62%, about 0.6 percentage point below the current level.