Fed Governor Waller sees that the central bank is getting ‘closer’ to an interest rate cut

Federal Reserve Governor Christopher Waller suggested Wednesday that interest rate cuts would happen soon as long as there are no major surprises on inflation and employment.

“I believe current data is consistent with achieving a soft landing, and I will be looking for data to support this view in the coming months,” Waller said in a briefing for a program at the Kansas City Fed. “So while I don’t believe we have reached our final destination, I do believe we are getting closer to the point where a policy rate cut is warranted.”

In line with statements from other policymakers, Waller’s sentiments point to the unlikelihood of a rate cut when the Federal Open Market Committee meets later this month, but a greater likelihood of a rate cut in September.

Central bankers have become more optimistic as data in recent months shows inflation is easing after a surprising move higher in the first three months of 2024.

Waller outlined three possible scenarios for the coming days: one in which inflation data becomes even more positive and warrants a rate cut in “the not-too-distant future”; a second in which the data fluctuates but still points to moderation; and a third in which inflation rises and forces the Fed to tighten policy.

Of these three, he considers the third scenario of unexpectedly stronger inflation to be the least likely.

“Given that I believe the first two scenarios have the highest probability of occurring, I believe the time to cut the policy rate is getting closer,” Waller said.

However, he noted that while financial markets are focusing heavily on the date when the Fed could cut rates, FOMC members are not.

“Assuming there isn’t a major impact on the economy, it doesn’t really matter from a macro perspective,” Waller said. “It’s not a specific meeting, it’s about when we think the conditions are right.”

Waller’s comments on Wednesday are of particular interest because he was among the more hawkish FOMC members this year, or among those who have advocated tighter monetary policy as fears escalated that inflation is proving more sustainable than expected.

In May, Waller told CNBC he expected the cuts to happen “in a few months” as he waited for more convincing data that inflation was easing. His speech on Wednesday showed that the threshold has almost been reached.

First, he said the labor market is “in a sweet spot,” with labor costs rising while wage growth cools. At the same time, the consumer price index fell 0.1% in June, while the annual core price figure of 3.3% was the lowest since April 2021.

“After disappointing data for early 2024, we now have a few months of data that I think is more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC’s price stability objective,” he said . “Evidence is mounting that the first quarter inflation data may have been an aberration and that the effects of tighter monetary policy fueled high inflation.”

The comments also echo what New York Fed President John Williams said told The Wall Street Journal in an interview published Wednesday. Williams noted that the inflation data is “all moving in the right direction and doing so quite consistently” and “brings us closer to a disinflationary trend that we are looking for.”

Markets are once again pricing in a more accommodative Fed.

Traders in the Fed Funds futures market are pricing in an initial rate cut of a quarter percentage point in September, followed by at least one more rate cut before the end of the year, according to CME Group’s FedWatch measure.

Fed Funds futures contracts currently imply a rate of 4.62% at year-end, about 0.6 percentage points below current levels.