Federal Reserve Governor Christopher Waller signaled on Wednesday that he plans to cut interest rates soon, barring any major surprises in inflation and employment.
“We believe the current data are consistent with achieving a soft landing and will be watching the data over the next few months to support this view,” Waller said during a program at the Kansas City Fed. “So while we don’t believe we’ve reached our final destination, we do believe we are approaching a time when a reduction in policy rates would be justified.”
Waller’s comments, like those of other policymakers, suggest that a rate cut is unlikely when the Federal Open Market Committee meets later this month, but that a cut in September is more likely.
Central bankers have become more optimistic after data in recent months showed inflation easing after an unexpected surge in the first three months of 2024.
Waller outlined three possible scenarios going forward: inflation data improves further, justifying a rate cut in the “not-too-distant future,” data fluctuates but still points to an easing trend, and inflation rises, forcing the Fed to tighten its stance.
Of the three scenarios, he believes the third, an unexpected surge in inflation, is the least likely.
“Given that I believe the first two scenarios are the most likely, I think the time to cut interest rates is approaching,” Waller said.
However, while financial markets are closely focused on the date when the Fed will begin cutting interest rates, FOMC members noted that this is not the case.
“Assuming there’s no major shock to the economy, it’s not that significant from a macro perspective,” Waller said. “It’s not a particular meeting that matters, it’s when they think the right conditions are in place to meet.”
Waller’s comments on Wednesday were particularly notable because he has been one of the more hawkish FOMC members this year and has argued for tighter monetary policy amid growing concerns that inflation is persisting longer than expected.
Waller told CNBC in May that he expected a rate cut to be “months away” as he awaited more compelling data showing inflation was receding. His Wednesday speech suggested that his threshold for a rate cut was nearly met.
For one, he said the labor market is in a “strong position,” with employment expanding while wage growth is slowing. At the same time, the Consumer Price Index fell 0.1% in June, and the core price index’s annual rate of 3.3% was the lowest since April 2021.
“While early 2024 data were disappointing, I view data in recent months as more consistent with steady progress in containing inflation over the last year and consistent with the FOMC’s price stability objective,” he said. “The first quarter inflation data may have been an anomaly, and there is growing evidence that tight monetary policy is keeping high inflation in check.”
The comments were in line with what New York Fed President John Williams told The Wall Street Journal on Wednesday, when he said inflation data “is all moving in the right direction and pretty consistent” and “getting closer to the deflationary trend that we want to see.”
Markets are once again starting to price in more accommodative policy from the Fed.
Traders in the federal funds rate futures market are expecting an initial 0.25 percentage point rate cut in September, followed by at least one more cut by the end of the year, according to CME Group’s FedWatch indicator.
Federal funds futures contracts currently suggest that interest rates will be 4.62% at year-end, about 0.6% below current levels.
