Christopher Waller, a Federal Reserve Governor, suggests that a cut in interest rates may be on the horizon, pending no significant surprises in inflation and employment data.
In his statements at a program hosted at the Kansas City Fed, Waller expressed confidence that current data support a soft economic landing and he will closely monitor upcoming data to reinforce his viewpoint. He believes that while the final decision has not been reached, the time for a rate cut is approaching.
Although the likelihood of a rate cut at the upcoming Federal Open Market Committee meeting this month seems low, Waller’s comments indicate a higher probability of a cut taking place in September.
Recent data showing a decrease in inflation levels have led central bankers to be more positive about the economic outlook.
Waller outlined three possible scenarios for the future: a scenario where positive inflation data warrants a rate cut soon, one where data fluctuates but points towards moderation, and a third where higher inflation pressures the Fed into a tighter monetary policy.
Waller views the scenario of unexpectedly strong inflation as the least probable and believes that the time for a rate cut is approaching given the higher likelihood of the first two scenarios.
However, he mentioned that while financial markets focus on the timing of a rate cut, FOMC members do not prioritize a specific meeting but rather waiting for the right conditions.
Waller’s statements are notable because he has been considered a more hawkish member of the FOMC this year, advocating for tighter monetary policies amid concerns of persistent inflation.
In his previous remarks in May, Waller anticipated that rate cuts were still a few months away pending more convincing evidence of receding inflation. His recent speech indicates that the conditions for a cut are nearly met.
He highlighted that the labor market is flourishing with expanding payrolls and cooling wage gains, coupled with a decline in the consumer price index in June and the lowest core price annual rate since April 2021.
Waller indicated that recent data aligns better with the consistent progress made in reducing inflation seen last year and moving towards the FOMC’s price stability objective.
Similar sentiments were echoed by New York Fed President John Williams, who noted that inflation data is heading in the right direction consistently, edging closer to the disinflationary trend sought after.
Market expectations also reflect a more accommodative stance by the Fed.
Traders in the fed funds futures market are pricing in a quarter percentage point rate cut in September followed by potentially another cut before year-end, as per the CME Group’s FedWatch measure.
The fed funds futures contracts suggest a 4.62% rate by the end of the year, approximately 0.6 percentage points lower than the current level.
Image Source: Peterson Institute for International Economics @ YouTube
