Federal Reserve Governor Christopher Waller said Friday he supports a half-percentage point interest rate cut at this week’s meeting because inflation is falling at a faster-than-expected pace.
Citing recent data on consumer and producer prices, Waller told CNBC that the Fed’s preferred measure, core inflation, which excludes food and energy, has been below 1.8% for the past four months. The Fed has a 2% annual inflation target.
“So I was a little surprised that inflation was easing up much faster than expected, and I think it’s 50%. [basis points] “That’s the right thing to do,” Waller said in an interview with CNBC’s Steve Reisman.
The Consumer Price Index and Producer Price Index both rose 0.2% for the month. On a trailing-12-month basis, the CPI rose 2.5%.
But Waller said recent data points to a stronger downward trend, giving the Fed room to ease further as it shifts its focus to supporting a softening labor market.
A week before the Federal Reserve met, markets were overwhelmingly pricing in a 25 basis point rate cut, with 1 basis point equal to 0.01%.
“The key is we have room to move, and the committee is signalling that,” he said.
The Fed’s decision to cut interest rates by half a percentage point (50 basis points), bringing its key borrowing rate to a range of 4.75% to 5%, prompted officials to signal the possibility of another half-point cut this year, followed by a one-percentage-point cut in 2025.
Federal Reserve Board Governor Michelle Bowman was the only member of the Federal Open Market Committee to vote against the rate cut, preferring instead a smaller cut of 0.25 percentage point. Bowman released a statement on Friday outlining her reasons for voting against the rate cut. This marks the first time a governor has voted against the rate cut since 2005.
“While it is important to recognize that meaningful progress has been made in containing inflation, with core inflation remaining around or above 2.5 percent, I believe there is a risk that the Committee’s more significant policy actions could be interpreted as a premature declaration of victory for its price stability mission,” Bowman said.
As for the future direction of interest rates, Waller suggested several scenarios could unfold depending on how economic data develops.
Futures markets volatility followed Waller’s comments, with traders now pricing in a 50-50 chance of another half-percentage point cut at the Nov. 6-7 meeting, according to CME Group’s FedWatch.
“At a time when inflation has been moving at a much faster pace than expected, I have been a strong advocate for significant rate hikes,” he said. “I would continue to do so on the downside to protect the credibility of our 2 percent inflation target. If indicators have weakened and continue to weaken, we would be prepared to cut rates aggressively to move inflation closer to our target.”
The Fed will look at inflation data again next week when the Commerce Department releases its August report on the personal consumption expenditures price index, the central bank’s preferred measure. Chairman Jerome Powell said Wednesday that Fed economists expect the measure to show inflation at an annualized rate of 2.2%, up from 3.3% a year ago.
