Fed's Waller leaning toward rate cut but open to a 'skip'

Bloomberg News

At least one Federal Reserve official is leaning toward cutting interest rates at the central bank's final monetary policy-setting meeting of the year.

In a speech delivered Monday afternoon, Fed Gov. Christopher Waller said the Federal Open Market Committee can reduce the federal funds rate by an additional quarter-percentage point without undoing its progress on inflation. But whether that cut should come this month or next will depend on a string of data releases over the coming weeks.

"Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target," Waller said. "That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant."

The Fed has reduced its policy rate by three-quarters of a percentage point this year, first cutting by a half-point in September then an additional 25 basis points in November. While lower rates could hurt net interest margins — the difference between the interest rates they pay on deposits and the rates they collect from borrowers — banks have largely celebrated the move as one that will open up more lending opportunities, alleviate paper losses on their balance sheets and help flatten the yield curve. 

Waller noted that FOMC members expect the federal funds rate to fall an additional percentage point by the end of next year, meaning it will hold rates steady at some meetings between now and then. The question he will be asking is whether the first skip should come this month or sometime down the line.

In his remarks, delivered at the American Institute for Economic Research's Monetary Conference in Washington, D.C., Waller said recent inflation trends have been somewhat discouraging. He noted that three-month annualized price growth has risen during the past two months, according to the core personal consumption expenditures, or PCE, index. Over the past six months, price growth is down only slightly. 

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Waller pointed toward nonhousing core services as the main factor keeping inflation at 2.8%, above the Fed's target of 2%. He said that such figures represent significant improvement from 2022 and 2023, but are too high for the Fed to declare victory. Still, he noted, that does not mean a skip is in order.

"Although monthly core inflation has flattened out in recent months, there is no indication that the pace of price increases for key service categories such as housing and nonmarket services should remain at their current levels or increase," he said. "Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way."

Waller said the overall picture on employment is "cloudy," noting that October labor surveys were distorted by large strikes and hurricane-related disruptions. He expects the November figures — due to be released on Friday — to paint a more favorable picture. If they do not, however, that could be an additional incentive to cut rates sooner rather than later.

Waller said he is frustrated that inflation has not come down further, but he remains confident that the Fed's monetary policy will eventually bring it to heel.

"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," he said. "But let me assure you that submission is inevitable — inflation isn't getting out of the octagon."