MNI: Waller Sees More Fed Cuts; Tariffs Won't Shift Inflation
MNI (WASHINGTON) - Federal Reserve Governor Chris Waller said Wednesday interest rates should continue to fall in 2025 as inflation cools further toward 2%, and tariffs aren't likely to have a lasting effect on that trend.
The median FOMC projection for the year is two quarter-point cuts, following 100bps of reductions since September, but views ranged from none to as many as five in the December update, Waller noted.
"As always, the extent of further easing will depend on what the data tell us about progress toward 2% inflation, but my bottom-line message is that I believe more cuts will be appropriate," he said in remarks prepared for an OECD event in Paris.
"If, as I expect, tariffs do not have a significant or persistent effect on inflation, they are unlikely to affect my view of appropriate monetary policy. Of course, we need to see what policies are enacted before we can seriously consider their effects." (See MNI INTERVIEW: Fed Won't Consider Cuts Until March - Benigno)
DISINFLATION STORY
Waller said the U.S. economy is on a solid footing, expected to have grown more than 2% in the final quarter of 2024 with a labor market close to full employment and showing no signs of a dramatic drop-off.
Progress on inflation appears to have stalled in the final months of 2024, with 12-month core PCE inflation at 2.8% in November, but the measure is down to 2.4% on a six-month annualized basis and month-on-month data for November was weaker than expected at just 0.11%, the governor said.
It was also notable that imputed, rather than observed, prices for housing and nonmarket services were driving inflation in 2024, he said, adding observed prices on average rose less than 2% over the past 12 months.
"I believe that inflation will continue to make progress toward our 2% goal over the medium term and that further reductions will be appropriate," he said.
GEOPOLITICAL RISK
The prospect of changes in trade policy in the U.S. and elsewhere as well as heightened geopolitical risk add to uncertainty for OECD member central banks, Waller said. Conflict and tariffs could emerge as upward pressures on U.S. inflation in the coming year, and have uncertain effects on the weak manufacturing sector across the OECD, he said. (See MNI INTERVIEW: US Factories To See Expansion By Feb- ISM)
Research shows that higher levels of geopolitical risk, and economic uncertainty more broadly, tend to foreshadow lower investment and employment, even if the outbreak of war in Europe and the Middle East have thus far had a surprisingly muted effect on financial markets, he said.
Countries and firms are rerouting trade flows to avoid geopolitical risk and tariffs, more carefully weighing the costs and benefits of global integration, and central bankers need to be prepared to respond appropriately in setting monetary policy and promoting financial stability, Waller urged.