MNI: Fed Getting Closer To Being Able To Cut Rates-Waller

The Federal Reserve is approaching the point where easing inflation and a softening labor market should allow it to begin cutting interest rates, Governor Christopher Waller said Wednesday, though he cautioned continued progress is not assured.

“While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” Waller said in prepared remarks. “The data over the past couple months shows the economy growing at a more moderate pace, labor supply and demand apparently in balance, and inflation slowing from earlier this year.”

The Fed must now be mindful that a jobless rate that has already climbed 0.7 ppt from its cycle lows surges further upward, Waller said.

“One implication of a balanced labor market is that the risk of it becoming too loose is more closely balanced with the risk of it being too tight. This is a policy challenge that we have not faced for the past couple years. As of today, I see there is more upside risk to unemployment than we have seen for a long time,” Waller said.

UPSIDE RISK TO UNEMPLOYMENT

Investors widely expect the Fed to begin cutting rates in September. Waller's comments on employment being fully back in balance echoed comments from Chair Jerome Powell last week. (See MNI INTERVIEW: June CPI Seals Deal For Sept Fed Cut-Tilley)

Waller said he expects ongoing inflation progress but stressed this is not a sure thing. "I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view," he said.

“The second scenario is a bit less optimistic but probably more likely to occur. In this case, the inflation data comes in uneven—not as good as the previous few months but still consistent overall with progress on bringing inflation down toward 2%,” he said. “Here, with the uneven data, it would be a matter of timing as to when I thought we are making sustainable progress to 2 percent inflation. In this case, a rate cut in the near future is more uncertain.”