Waller Supports Potential Rate Cut

By Howard Schneider

WASHINGTON (Reuters) – Federal Reserve Governor Christopher Waller, whose views are often a bellwether for U.S. monetary policy, indicated on Monday that with inflation expected to drop to 2%, he is currently inclined to support another interest rate cut later this month.

Waller's remarks, from a key U.S. rate-setter, led investors to increase their expectations for a rate cut at the Fed's December 17-18 meeting to nearly 75%, causing a decline in yields on the two-year Treasury note.

> "Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target," Waller stated during a central bank symposium organized by the American Institute for Economic Research.

As the Fed approaches the blackout period for public comments ahead of the December meeting, Atlanta Fed President Raphael Bostic remarked that he does not view the meeting's outcome as “preordained.” New York Fed President John Williams did not discuss the December question in his prepared remarks but expressed the need for further rate cuts over time.

Fed Chair Jerome Powell is expected to weigh in on the matter with public remarks in New York on Wednesday. Both Waller and Bostic emphasized that upcoming data on inflation, jobs, and consumer spending will be crucial in determining whether rates should be cut as anticipated.

> "All of that information will help me decide whether to cut or skip. As of today, I am leaning toward continuing the work we have started in returning monetary policy to a more neutral setting with continued rate cuts," Waller noted, highlighting his key role in shaping the Fed's strategy to combat inflation, which surged to a 40-year high in 2022.

The Economic Context

The Fed commenced its rate reductions in September, starting with a half-point decrease, followed by a quarter-point cut in November. A further quarter-point reduction in December is widely expected, although recent inflation data has sparked fears that progress may have hit a plateau. One essential measure, the personal consumption expenditures price index excluding food and energy costs, has stagnated between 2.6% and 2.8% since May, well above the Fed's 2% target.

> "If the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant," Waller stated.

Waller expects that rates will likely continue to decrease next year, although the extent and pace of these reductions have yet to be determined. The Fed will present new economic projections at its next meeting, outlining anticipated cuts to their benchmark rate for the upcoming year, which currently stands between 4.5% and 4.75%.

> "The evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard," Waller remarked. "I expect rate cuts to continue over the next year until we approach a more neutral setting of the policy rate."

Recent data consistently reflects a narrative of moderating demand relative to supply, in alignment with ongoing progress toward 2% inflation, without an undesirable weakening in the labor market, Waller explained.

> "Let me assure you that submission is inevitable – inflation isn’t getting out of the octagon," Waller said, drawing an analogy between the Fed's struggle with inflation and a mixed martial arts fighter in a unique arena.