Leaning Toward a Rate Cut, With Caution
Federal Reserve Governor Christopher Waller indicated on Monday that he is inclined to support a rate cut at the Federal Reserve’s December meeting. However, he expressed concerns about recent inflation data that could influence his decision. Speaking at a monetary policy forum in Washington, Waller stated that current economic data and forecasts suggest inflation is on track to continue its downward path toward the Fed’s 2% target over the medium term. Under these conditions, he supports a rate cut. Yet, he added that any unexpected data showing stronger-than-anticipated inflation could alter his stance.
In October, the Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) Price Index, showed headline inflation increasing to 2.3% annually, while core inflation, which excludes food and energy, rose to 2.8%. Although these figures met market expectations, they represented an uptick from the prior month, highlighting ongoing challenges in meeting the Fed’s 2% inflation goal.
Challenges in Controlling Inflation
Waller likened the battle against inflation to a mixed martial arts fight, stating, “I feel like an MMA fighter who keeps inflation in a chokehold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute.” Despite these challenges, he assured that inflation will eventually be subdued.
Markets broadly expect the Fed to reduce its benchmark interest rate by 25 basis points during the December 17-18 meeting. This would follow a 50-basis-point cut in September and a 25-basis-point reduction in November. Waller emphasized that the Fed’s ongoing effort is aimed at moving monetary policy toward a “neutral” setting, where it neither stimulates nor restricts economic activity.
Monitoring Economic Health
Waller stressed the importance of closely monitoring upcoming employment and inflation data. The Bureau of Labor Statistics is set to release job openings and nonfarm payroll reports this week. October’s nonfarm payroll gains were a modest 12,000, largely due to factors like labor strikes and adverse weather conditions.
While acknowledging the slowdown in inflation progress, Waller remains optimistic about the broader health of the economy. He noted that even after a cumulative 75 basis points of rate cuts, the current policy stance remains restrictive. Additional rate cuts would signal a reduced level of restriction rather than outright accommodation.
Views From Other Fed Officials
New York Fed President John Williams also expressed confidence on Monday that inflation is trending downward. He reiterated the likelihood of monetary policy moving toward a “neutral” position over time, though he did not specify any immediate actions.
Market Implications and Outlook
Waller’s remarks highlight the Fed’s cautious approach toward rate cuts, emphasizing the importance of incoming economic data, particularly on inflation and employment. For forex market participants, this underscores the need to closely monitor these developments, as they will shape expectations for U.S. monetary policy and influence the movement of the U.S. dollar and other major currencies in the weeks ahead.
