Federal Reserve Governor Christopher Waller recently hinted at the possibility of interest rate cuts in the near future, provided there are no unexpected developments in inflation and employment. According to Waller, the current economic data align with the prospect of a soft landing, and he anticipates further data in the upcoming months to support this viewpoint. While he does not believe that the final destination has been reached, he suggests that the time for a policy rate cut is approaching.
Waller outlined three potential scenarios for the days ahead. The first scenario involves inflation data becoming even more favorable, leading to a rate cut in the near future. The second scenario entails fluctuating data that still indicates a moderation trend. Lastly, the third scenario envisions higher inflation, which would compel the Fed to adopt a tighter policy stance. Waller deems the third scenario, marked by unexpectedly strong inflation, as the least probable among the three.
Waller’s recent comments are noteworthy because he has been considered one of the more hawkish members of the Federal Open Market Committee this year. His stance on monetary policy has been characterized by advocating for a tighter approach amid concerns of persistent inflation. However, his recent speech signals a shift in his position, indicating a growing inclination towards a rate cut. Emphasizing that the labor market is in a favorable state and citing the decline in the consumer price index, Waller suggests that the evidence is mounting in favor of reevaluating the need for a rate cut.
Waller’s sentiments echo those of other policymakers, including New York Fed President John Williams, who have expressed optimism regarding the trajectory of inflation data. Williams highlighted a trend of moving towards a disinflationary path, aligning with Waller’s perspective. Moreover, market indicators, such as fed funds futures contracts, reflect expectations of a more accommodative stance from the Fed. Traders are pricing in a quarter percentage point rate cut in September, followed by additional cuts before the year concludes.
The market response to hints of impending rate cuts has been notable, with fed funds futures contracts indicating a lower expected rate by the end of the year. The CME Group’s FedWatch measure suggests a 4.62% rate at the end of the year, which is 0.6 percentage points below the current level. This shift in market expectations underscores the anticipation of a change in monetary policy by the Federal Reserve.
The evolving economic data, coupled with the perspectives of key policymakers like Waller and Williams, point towards a growing likelihood of interest rate cuts in the near future. As uncertainties persist regarding inflation and employment, the Fed appears poised to consider a more accommodative approach to support economic stability and growth.