Federal Reserve Governor Christopher Waller said in a speech on Tuesday that the central bank could cut interest rates this year if inflation continues to ease, but he cautioned against moving too swiftly on rate reductions. His comments come as investors debate whether the Fed will slash rates in the coming months after raising them aggressively in 2022 to fight high inflation.
Waller: Inflation Fight Seems Nearly Won, But More Progress Needed
In his speech at the Brookings Institution, Waller said “the battle against inflation looks to be nearly won” thanks to the Fed’s policy tightening and easing supply chain pressures. However, he noted inflation remains “very high” at around 5% currently, well above the Fed’s 2% target.
“There is still a long way to go,” Waller said. He wants to see inflation measures like the personal consumption expenditures price index declining “persistently” toward 2% before declaring clear victory. Most FOMC participants similarly would like reassurance that inflation is moving convincingly back to target.
Rate Cuts Possible If Inflation Falls Further
While cautioning against rushing into rate cuts, Waller did open the door to potential reductions later this year if the inflation outlook keeps improving.
“I expect the debate on rate cuts to heat up around the middle of this year,” Waller said, adding he sees a “reasonable case” for cuts in 2024 if core inflation readings drop closer to 3%.
“The data of the past few months have already allowed Fed officials to tentatively discuss cutting rates,” Waller commented.
Market pricing currently implies around a 67% chance of a 25 basis point rate cut by July, according to CME Group’s FedWatch tool.
Not Locked Into Rate Hikes, But Gradual Cuts Needed
Waller stressed policymakers are “not locked into rate hikes” and are willing to switch to cuts “if the data and the outlook warrant doing so.” However, he argued for taking a “careful and methodical approach.”
“We should favor rate cuts that are modest, persistent, and enabling us to clearly assess the impact on the economy,” Waller noted. “We don’t want to rush rate cuts, only to have to reverse course later.”
His view aligns closely with commentary from Fed Chair Jerome Powell, who recently said “no one should doubt” the central bank’s commitment to achieving its 2% inflation goal while also avoiding recession.
Market Reaction Muted As Focus Stays on Inflation
The initial market reaction to Waller’s speech appeared rather muted, with Treasury yields and stock index futures showing little change.
Analysts said Waller struck a balanced tone that market participants largely expected. His comments “were not nearly as dovish as some of the recent Fedspeak,” noted ING economists.
Ultimately Waller’s inflation focus resonates with investors right now. “Traders remain squarely concentrated on signs of sticky inflation versus indications of fledgling disinflation,” explained BCA Research’s Doug Peta.
Fed Likely Debates Timing of Rate Cuts
While Waller laid out conditions for potential Fed rate cuts this year, some economists think policymakers may opt to wait until 2025 before reducing interest rates.
“I don’t expect rate cuts until 2025,” said economist Bernard Baumohl. “Inflation risks still remain elevated, particularly with a still-tight labor market and rising wages.”
However, Waller noted the timing of rate cuts will come down to the judgment of the FOMC. Committee members will closely analyze upcoming inflation data before making conclusions about shifting to an easier policy stance.
Path of Rate Cuts Remains Uncertain
In his speech Q&A, Waller emphasized there is still “huge uncertainty” around the future path of interest rates.
“It’s going to be up to the committee when we decide it’s time to start cutting rates,” Waller commented. “I can’t give you an exact time or timing.”
While Waller acknowledged it’s possible for the Fed to cut rates before year-end 2024, economists cautioned against assuming cuts will definitely materialize on any set schedule.
“There are still significant risks of higher inflation that could alter expectations for rate cuts,” UBS analyst Carl Weinberg noted.
Bottom Line: Data Determines Policy Path
In the end, Waller stressed actual economic data and trends — not forecasts or assumptions — will drive the Fed’s policy actions over the rest of 2024.
If current disinflationary momentum stalls and rising prices regain traction, the Fed may hesitate to lower rates anytime soon. But further declines in core inflation closer to the 2% target would likely prompt easier monetary policy.
“I don’t think we should assume inflation will continue descending without volatility,” Waller concluded. “We need to take this cautiously and allow the data to guide us.”
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