Federal Reserve Governor Christopher Waller stated on Tuesday that further interest rate increases might not be necessary, citing various data indicating that inflation appears to be easing.
However, he emphasized that he would need substantial evidence before supporting any rate cuts in the near future.
Waller, known for his hawkish stance favoring tighter monetary policy, made these remarks during an appearance at the Peterson Institute for International Economics in Washington.
He pointed to recent data, including flattening retail sales and cooling in both the manufacturing and services sectors, as signs that the Fed’s higher rates have successfully reduced demand, which had driven the highest inflation rates in over 40 years.
Labor Market and Inflation Data
Although payroll gains have been strong, Waller noted that internal metrics, such as the rate at which workers are leaving their jobs, indicate a loosening in the ultra-tight labor market that had previously driven up wages. This development is closer to the Fed’s 2% inflation goal.
Despite these observations, Waller, a permanent voting member of the rate-setting Federal Open Market Committee, remains cautious about supporting interest rate cuts.
He stated, “The economy now seems to be evolving closer to what the Committee expected. Nevertheless, in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy.”
Recent Inflation Reports
April’s consumer price index showed inflation running at a 3.4% rate from a year ago, slightly down from March, with a 0.3% monthly increase that was below Wall Street economists’ expectations.
Waller described this report as “a welcome relief” but graded it a C-plus, noting that the modest progress did not change his view that more evidence of moderating inflation is necessary before considering easing monetary policy.
Waller elaborated on this cautious approach by highlighting the importance of continued observation of economic indicators. He pointed out that while one or two months of improved data are encouraging, a longer trend of positive results is necessary to ensure that inflation is genuinely under control.
Market Expectations for Monetary Policy
Market expectations for monetary policy have shifted significantly this year. Initially, futures market traders anticipated at least six rate cuts starting in March.
However, higher-than-expected inflation data altered this outlook, with the first cut now expected no earlier than September, and at most two quarter-point reductions before the end of the year, according to the CME Group’s FedWatch Tool.
Waller did not specify his expectations regarding the timing or extent of future rate cuts, stating that he would “keep that to myself for now” regarding the specific progress he wants to see in future inflation reports.
He underscored the importance of flexibility in monetary policy, given the evolving economic landscape.
Economic Indicators and Future Outlook
Waller’s remarks also touched upon the broader economic indicators that the Federal Reserve monitors to make informed policy decisions.
These include metrics such as consumer spending, business investment, and global economic conditions. He stressed that while current data is promising, the Fed’s decisions will remain data-dependent.
The Fed’s cautious stance reflects a broader concern about premature easing, which could undermine the progress made in curbing inflation.
By maintaining higher interest rates until there is clear and sustained evidence of inflation reduction, the Fed aims to avoid the risk of a resurgence in inflationary pressures.
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