Another Fed official backs a rate cut this month

Christopher Waller
Federal Reserve Gov. Christopher Waller.
Al Drago/Bloomberg

Another key Federal Reserve policymaker has thrown his weight behind a rate cut at this month's Federal Open Market Committee meeting.

Fed Gov. Christopher Waller said the central bank was wise not to jump the gun on rate cuts during the banking crisis of March 2023 or when inflation unexpectedly cooled last year, but the time has come to reduce the target range for the federal funds rate.

"I believe our patience over the past 18 months has served us well," Waller said Friday in a speech at the University of Notre Dame in Indiana. "But the current batch of data no longer requires patience, it requires action."

Waller's remarks came just hours after Federal Reserve Bank of New York President John Williams said it was time to "dial down" the Fed's restrictive monetary policy. Both speeches follow Fed Chair Jerome Powell's assertion that the time has come for a change in policy. 

But Waller's comments were the most direct endorsement for a rate cut at the FOMC's Sept. 17-18 meeting yet from a Fed official. He also called for a series of rate cuts at subsequent meetings, noting that there is "sufficient room to cut the policy rate and still remain somewhat restrictive." 

Waller said he has not yet decided on the appropriate size of a cut at this month's meeting, nor has he committed to a specific schedule of policy rate reductions. He said cutting rates quickly and aggressively would give the U.S. the best chance at a so-called soft-landing — completing a tightening cycle without triggering a recession — but added that going too fast could allow inflation to ramp up again. 

"Determining the pace of rate cuts and ultimately the total reduction in the policy rate are decisions that lie in the future," he said. "As of today, I believe it is important to start the rate-cutting process at our next meeting. If subsequent data show a significant deterioration in the labor market, the FOMC can act quickly and forcefully to adjust monetary policy."

A proponent of "front-loading" rate hikes — moving rapidly to get to the Fed's desired rate level — Waller said he would favor a similar approach to rate cuts, but only if the FOMC deems it appropriate based on economic data.

Waller pointed to developments in pricing and employment as justification for easing policy. He highlighted sustained declines in inflation from its 2022 peak and said that while the unemployment rate has remained low, the labor market has shown signs of loosening as job vacancies have fallen.

The Fed governor pointed to Friday's jobs report from the Bureau of Labor Statistics as further evidence of this trend. The survey estimates that 142,000 jobs were added last month — slightly lower than market expectations — and the unemployment rate eased slightly to 4.2%. 

Waller described these developments as a "softening" but not a "deterioration" in the overall economy. He said he does not expect a recession despite readings from certain economic indicators. One such early warning mechanism is the Sahm rule, which states that recessions typically follow a half-percentage-point uptick in the three-month moving average of the national unemployment rate over the previous 12 months, which happened earlier this year.

"While this is a correlation that certainly bears attention, I want to make a few cautionary points about relying on such rules in deciding that a recession has begun," Waller said. "As we have seen in the recent past with other supposedly reliable recession rules, such as an inverted yield curve, there is more to forecasting economic outcomes than the relationships between a couple of variables."

Waller also weighed in on the topic of Fed independence in the light of recent comments from former President Donald Trump, who said he believes he should have a say in shaping monetary policy if re-elected this fall. 

Waller, one of two Trump appointees to the Fed Board of Governors (the other being Michelle Bowman), said the Fed's independence in setting monetary policy is supported broadly both in Congress and within the private sector. 

"The financial markets do not want to see a politically driven Federal Reserve in terms of policy," Waller said. "If the president wants to complain about it, he's free to do so, just like everybody else. Doesn't mean I have to listen or adjust policy, but he's entitled to any damn opinion he wants, just like everybody else."

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Federal Reserve Politics and policy
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