Fed Governor Waller Hints at December Interest Rate Cut, But Inflation Concerns Remain
Federal Reserve Governor Christopher Waller expressed cautious optimism on Monday, suggesting a potential interest rate cut in December. However, he voiced significant concerns about recent inflation data, signaling that the decision hinges precariously on upcoming economic indicators. While Waller currently leans towards supporting a rate reduction, he emphasized that this stance is contingent on incoming data not exhibiting any unwelcome surprises. This delicate balance reflects the persistent challenge the Federal Reserve faces in navigating the complexities of a still-evolving economic landscape. The coming weeks will be crucial in determining the ultimate course of action.
Key Takeaways:
- Potential December Rate Cut: Governor Waller indicated a preference for lowering interest rates at the December meeting, suggesting continued easing of monetary policy.
- Inflation Concerns: His support for a rate cut is conditional, strongly dependent on upcoming economic data. Recent inflation figures show progress stalling, raising worries.
- Data Dependence: The ultimate decision rests entirely on incoming data, particularly employment and inflation reports. October's inflation numbers, while meeting Wall Street expectations, showed a concerning uptick.
- Restrictive Policy: Even with potential cuts, Waller believes current monetary policy remains significantly restrictive, justifying further easing.
- Market Expectations: Markets are anticipating another quarter-point rate reduction in December, following previous cuts in September and November, adding to anticipation.
The Federal Reserve, grappling with the persistent tug-of-war between economic growth and inflation control, finds itself once again at a pivotal juncture. Governor Waller's statement, delivered before a monetary policy forum in Washington, reflects the nuanced and cautious approach the central bank is currently adopting.
Waller explicitly stated, "Based on the economic data in hand today and forecasts that show that inflation will continue on its downward path to 2 percent over the medium term, at present I lean toward supporting a cut to the policy rate at our December meeting." This seemingly confident declaration is immediately tempered by a crucial caveat: "However, he noted that the 'decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.'" This highlights the data-dependent nature of the Fed's policy decisions.
The source of Waller's apprehension lies in the recent economic data. October's Personal Consumption Expenditures (PCE) price index, the Fed's preferred inflation gauge, revealed headline inflation rising to 2.3% annually and core inflation (excluding food and energy) reaching 2.8%. While these figures aligned with market expectations, they represent an increase from the previous month and underscore the sluggish progress in achieving the Fed's 2% inflation target. This lack of significant continued downward momentum is what triggered Waller's MMA fighter analogy. He colorfully remarked, "Overall, I feel like an MMA fighter who keeps getting inflation in a choke hold, waiting for it to tap out yet it keeps slipping out of my grasp at the last minute...But let me assure you that submission is inevitable — inflation isn't getting out of the octagon." This vividly portrays the persistent struggle to bring inflation under control.
The upcoming economic reports hold immense significance. The Bureau of Labor Statistics is set to release crucial data on job openings and nonfarm payrolls this week. The October nonfarm payroll figures, a meager 12,000 net increase, were significantly impacted by labor strikes and adverse weather conditions. These figures, along with the forthcoming data, will provide valuable insights into the health of the labor market and its interaction with inflation. This data is paramount in shaping Waller's, and the Federal Reserve's overall, decision-making process regarding interest rates.
Even with the less-than-ideal progress on inflation, Waller remains optimistic about the broader economic outlook. He maintains that easing monetary policy remains appropriate, stating, "After we cut by 75 basis points, I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren't pressing on the brake pedal quite as hard." This indicates a belief that while inflation remains a concern, the current level of interest rates is still overly restrictive on economic growth. The implication is that further cuts could help stimulate the economy without unduly fueling inflation.
The markets currently anticipate a further quarter percentage point reduction in the benchmark overnight borrowing rate at the December 17-18 meeting. This would follow the half-point cut in September and the quarter-point cut in November, demonstrating a consistent trend towards a less restrictive monetary policy. The markets’ expectation is in rough concurrence with Waller's stated leanings, adding to the possibility that the projected cut will indeed happen as predicted.
However, there is nothing guaranteed. Waller's repeated emphasis on the data dependency of the December decision underscores the prevailing uncertainty. The upcoming economic indicators hold the key to determining whether the Fed will continue its easing of monetary policy or pause to reassess the situation in light of potentially problematic inflation levels. The coming weeks promise to be a significant period for financial markets, with investors closely monitoring every piece of incoming economic data. The Federal Reserve's decision in December will undoubtedly have profound implications for the US economy and the global financial landscape. Depending on the nature of the revealed statistics, we may be on a continuous path of rate cuts, or may be witness to a complete reversal of that trend.