Fed Governor Waller Advocates for Aggressive Rate Cuts as Inflation Softening Faster Than Expected
The Federal Reserve’s decision to cut interest rates by a half percentage point this week was driven by a faster-than-expected decline in inflation, according to Fed Governor Christopher Waller. Waller, a known hawk who has previously advocated for aggressive rate hikes to combat inflation, now believes that the Fed has room to act decisively in lowering rates to support the weakening labor market. He emphasized the recent data on consumer and producer prices, which showed that core inflation, excluding food and energy, is running below 1.8% over the past four months, highlighting a significant softening of inflation pressure.
Key Takeaways:
- Inflation softening faster than anticipated: Waller expressed surprise at the rapid decline in inflation, suggesting that the Fed’s aggressive rate hikes are having a significant impact.
- Fed pivoting to support the labor market: While inflation remains above the Fed’s target of 2%, the focus is shifting towards protecting the labor market, which is showing signs of weakening.
- Further rate cuts expected: The Fed’s decision to cut rates by 50 basis points signals their commitment to easing monetary policy, with further reductions anticipated in the coming months.
- Data dependent approach: The future course of rate cuts will be data-dependent, with the Fed closely monitoring incoming inflation data.
A Shift in Tone From a Well-Known Hawk
Waller’s shift in stance from a staunch advocate of aggressive rate hikes to supporting substantial rate cuts demonstrates a significant change in the Fed’s thinking. This change is driven by the recent data, which show a sharper-than-expected decline in inflation, which Waller described as "softening much faster than I thought it was going to."
Room to Move
The Fed’s decision to cut rates by 50 basis points brings its key borrowing rate down to a range between 4.75%-5%. Despite this cut, Waller emphasized that "we do have room to move," implying that further rate cuts are likely if economic data continues to indicate a softening in inflation.
Aggressive Cuts on the Horizon?
Waller’s strong stance on the need for further rate cuts suggests a more aggressive approach to cooling inflation and supporting the labor market. He indicated that if data remains favorable and shows continuing softening of inflation, he would be "much more willing to be aggressive on rate cuts to get inflation closer to our target."
More Data to Come
The Fed’s decision to cut rates was based on the available data, but the coming weeks will provide further insight into the state of the economy. The Commerce Department will release the August report on the Personal Consumption Expenditures Price Index (PCE), the Fed’s preferred measure of inflation, next week. This report will provide valuable information about inflation trends and will likely influence the Fed’s future monetary policy decisions.
Conclusion
Waller’s comments highlight a turning point in the Fed’s approach to managing the economy. The focus is now shifting toward providing support for the labor market, while remaining vigilant in ensuring that inflation returns to the 2% target. The coming months will be crucial to assess the effectiveness of the Fed’s current course of action and to determine the appropriate pace and magnitude of future rate adjustments.
