Fed’s Waller Says Rate Cuts Will Have To Wait Until ‘Several More Months’ Of Good Inflation Data

Rate cuts will have to wait, Federal Reserve Governor Christopher Waller said Tuesday.

“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,” Waller said in a speech delivered at the Peterson Institute for International Economics.

Waller said the April Consumer Price Index (CPI) data, which showed a slight cooling of inflation, was a “welcome relief” and a sign that inflation is not accelerating. As a result, the Fed probably will not need to raise rates, Waller said.

“Central bankers should never say never, but the data suggests that inflation isn’t accelerating, and I believe that further increases in the policy rate are probably unnecessary,” he stated.

But the economic data also indicates that the Fed does not need to hurry to cut rates, Waller said. Some analysts have said that the Fed is unnecessarily risking a recession by holding rates at current levels rather.

“We’re not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off a cliff,” he said.

The Federal Reserve has maintained its benchmark interest rate in the 5.25 percent to 5.5 percent range since last July, the highest in 23 years. While market traders speculate that the first rate cut could occur in September, Waller and other Fed officials have been cautious about committing to a specific timeline.

April’s CPI data indicated an annual inflation rate of 3.4 percent, with a monthly increase of 0.3 percent, both slightly below Wall Street expectations. Waller said he would give the report a grade of “C+,” signaling that while progress has been made, it remains insufficient to warrant easing.

“While the April inflation data represents progress, the amount of progress was small,” Waller said.

Waller indicated that he expects an economic slowdown in the coming months. He pointed to the contraction in the Institute for Supply Management (ISM) surveys for both manufacturing and services in April, and flat retail sales data as indicators of moderating economic activity. This suggests to him that monetary policy is sufficiently restrictive and that progress toward the Fed’s goal of two percent inflation has likely resumed.

“One month does not constitute a trend, but this data suggests that policy is doing its job to moderate aggregate demand, which will support renewed progress in lowering inflation,” Waller said.

Despite robust payroll gains, Waller cited internal labor market metrics, such as the rate at which workers are leaving their jobs, as evidence of a loosening labor market. “The economy now seems to be evolving closer to what the Committee expected,” he noted. Nevertheless, he remains hesitant to support rate cuts, stressing the need for more evidence of sustained moderating inflation.

Waller’s comments align with those of other Fed officials who have advocated for a “higher-for-longer” approach. Fed Chair Jerome Powell also indicated last week that more data is needed to make a judgment on whether inflation is steadily falling.

The Fed will meet again in June and July, when markets expect the Fed to hold rates steady. Waller’s remarks on Tuesday appeared to confirm the view that the Fed will not be ready to cut at those meetings. There is no meeting in August.

Prices of fed funds futures, which allow traders to speculate on fed policy, indicate there is a slightly better-than-even chance of a cut in September. The market currently gives around a 77 percent chance of a rate cut by the following meeting in November and nearly a 90 percent chance of a cut by December.

By the September meeting, the Fed will have inflation data for the months of May, June, July, and August. Waiting until the November meeting would mean the Fed would also have data for September but October’s consumer price index report will not be published until a week after the meeting.

“What do I mean by good data? What grade do I need to give future inflation reports?” Waller asked. “I will keep that to myself for now but let’s say that I look forward to the day when I don’t have to go out two or three decimal places in the monthly inflation data to find the good news.”