Federal Reserve Governor Christopher Waller recently stated that interest rate cuts are likely to happen soon, provided there are no major surprises regarding inflation and employment. Waller believes that the current economic data support achieving a soft landing, and he will closely monitor the data in the coming months to strengthen this viewpoint. While he does not think that the final destination has been reached, he does believe that a policy rate cut is becoming increasingly necessary.
According to Waller, there are three potential scenarios that could unfold in the near future. The first scenario involves inflation data continuing to improve, leading to a rate cut in the near term. The second scenario suggests that although the data may fluctuate, it still points towards moderation. The third scenario, which Waller considers the least likely, involves inflation rising unexpectedly, forcing the Fed to adopt a tighter policy stance. Given the probabilities of these scenarios, Waller believes that the time for a rate cut is approaching.
Waller’s remarks mark a significant shift in sentiment, especially considering that he has been one of the more hawkish members of the Federal Open Market Committee this year. In May, Waller indicated that rate cuts were still a few months away, pending convincing evidence of receding inflation. However, his recent speech suggests that the conditions for a rate cut are close to being met.
Waller highlighted several positive economic indicators, including the labor market being in a favorable position with expanding payrolls and cooling wage gains. Additionally, the consumer price index declined in June, and the annual core price rate was at its lowest level since April 2021. Waller sees these developments as evidence that the inflation data from the first quarter may have been an anomaly and that tighter monetary policy has been effective in curbing high inflation.
Waller’s comments are consistent with those of New York Fed President John Williams, who also mentioned that inflation data is moving in the right direction towards a disinflationary trend. As a result, the markets are once again anticipating a more accommodative stance from the Fed. Traders in the fed funds futures market are pricing in a quarter percentage point rate cut in September, followed by at least one more cut before the end of the year.
The CME Group’s FedWatch measure indicates that fed funds futures contracts are implying a lower rate at the end of the year compared to the current level. This suggests that investors are preparing for a series of rate cuts over the coming months based on the evolving economic data and the sentiments expressed by Federal Reserve officials like Waller and Williams.
Federal Reserve Governor Christopher Waller’s remarks highlight the potential for future interest rate cuts based on the evolving economic conditions. The shift in sentiment towards a more accommodative policy stance suggests that the Fed is closely monitoring economic data to determine the appropriate timing for rate adjustments. As investors brace for potential rate cuts, Waller’s comments underscore the importance of staying attuned to changing economic indicators and Fed policies in the months ahead.