Fed’s Waller Urges Caution Before Cutting Interest Rates

Federal Reserve Governor Christopher Waller has emphasized the need for more evidence that inflation is cooling before supporting interest rate cuts. In a recent policy speech delivered in Minneapolis, Waller questioned the rush to lower rates, citing higher-than-expected inflation readings for January. He expressed concerns about the trajectory of prices and the appropriate response from the Fed.

Waller acknowledged that last week’s high reading on the Consumer Price Index (CPI) inflation may just be a temporary obstacle, but it could also be a signal that the progress made in controlling inflation over the past year is stalling. Despite his expectation that the Federal Open Market Committee (FOMC) will begin lowering rates this year, Waller sees predominantly upside risks to his projection that inflation will reach the Fed’s 2% target.

The governor highlighted the strong 3.3% annualized growth in gross domestic product (GDP) and employment as factors supporting his view that inflation is unlikely to fall below 2% in the near future. He stated that these conditions make the decision to be patient with easing monetary policy simpler. Waller emphasized the need for at least a couple more months of inflation data to determine whether January’s reading was a minor setback or a more significant issue.

Waller’s remarks align with the general sentiment at the central bank, which suggests that while further rate hikes are unlikely, the timing and pace of rate cuts remain uncertain. The recent inflation data confirms the rise in the consumer price index, with a 0.3% increase in January and a 3.1% year-on-year increase. Core CPI, excluding food and energy, rose by 0.4% on the month and ran at a 3.9% annual pace.

Considering this data, Waller anticipates that core personal consumption expenditure prices, the Fed’s preferred inflation gauge, will show a 2.8% 12-month gain when released. He emphasized the importance of monitoring consumer spending, employment, and wages for further indications of inflation trends. Waller pointed to unexpected declines in retail sales and strong payroll growth as factors that require careful observation.

While Waller expects monetary policy easing to begin this year, he stressed that the decision on rate cuts and their frequency will depend on incoming data. The market, which previously anticipated a rate cut in March, has pushed back expectations to the June meeting, with a probability of 1 in 3 that the FOMC may even wait until July.

Fed Vice Chair Philip Jefferson also conveyed a noncommittal stance on the pace of cuts, only expressing his expectation for easing “later this year.” Governor Lisa Cook acknowledged the Fed’s progress in managing inflation without causing economic downturns but emphasized the need for greater confidence in the sustainability of inflation’s return to 2%.

In conclusion, while inflation concerns persist, Waller reminds us of the importance of patience and data-backed decision-making. The Fed’s cautious approach to rate cuts reflects a commitment to balance economic growth with price stability.

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