MNI: Waller Says Fed Can Cut Rates 'Methodically, Carefully'

The Federal Reserve can lower interest rates "methodically and carefully" this year if inflation keeps moderating, Governor Christopher Waller said Tuesday, adding he's more confident than he's been since 2021 that inflation is on a path toward 2%.

His remarks are in line with other FOMC viewpoints since the start of the year flagging potential interest rate cuts, should the economy continue to cool and inflation recede.

"As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year. This view is consistent with the FOMC’s economic projections in December, in which the median projection was three 25-basis-point cuts in 2024," he said in remarks prepared for the Brookings Institution in Washington.

"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully." (See: MNI INTERVIEW: Fed To Ease Modestly In '24 -Ex NYFed's Benigno)

Unlike many previous cycles in which recession risks prompted large rate cuts, the economy and labor markets are "in good shape" and inflation is coming down gradually to 2%, he said. "I see no reason to move as quickly or cut as rapidly as in the past."

RISKS TO OUTLOOK

The timing and number of rate cuts will be driven by incoming data, the Fed governor said.

If data show a lack of progress on inflation, or that economic activity did not moderate in the fourth quarter of 2023, or the labor market stops improving, that would delay or dampen his expectation for cuts this year, Waller said. He noted he will watch closely annual revisions to CPI next month to confirm the progress seen so far.

"Based on economic activity and the cooling of the labor market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2% PCE inflation. I think we are close, but I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal."

While the emphasis of policy has been on fighting inflation, the FOMC's focus is now likely to be a more balanced approach of "keeping inflation on a 2% path while also keeping employment near its maximum level," Waller said. "I will be watching for sustained progress on inflation and modest cooling in the labor market that doesn’t not harm the economy."