"Several Months of Good Inflation Data Needed Before Rate Cuts," Says Fed Governor Waller

Federal Reserve Governor Christopher Waller expressed his stance on the current interest rate policy during a speech at the Peterson Institute for International Economics in Washington on Tuesday. Highlighting recent economic data, Waller suggested that while further interest rate increases might not be necessary, he remains cautious about supporting rate cuts anytime soon.

Key Takeaways:

1. Fed Governor Christopher Waller believes no further rate hikes are needed but requires more favorable inflation data before supporting rate cuts.

2. Recent economic indicators, including the April CPI report, suggest that inflation is easing but not sufficiently to justify policy easing.

3. Waller remains cautious, indicating the need for several months of good inflation data before backing any rate cuts.

4. Market expectations have shifted, with the first rate cut anticipated around September based on current data.

5. The Fed's future actions will depend on continued improvements in inflation metrics and overall economic conditions.
   

Waller noted that indicators point to inflation cooling off, thanks to the Fed's tighter monetary policy. "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," said Waller, who is known for his hawkish views favoring tighter monetary policy.

Despite the easing inflation, Waller emphasized the need for continued improvement before considering rate cuts. "The economy now seems to be evolving closer to what the Committee expected," he said. "Nevertheless, 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."

Inflation Data and Economic Indicators

Recent data has shown signs of easing inflation pressures. April’s consumer price index (CPI) reported a 3.4% increase from the previous year, slightly below market expectations. The monthly increase was 0.3%, which was also less than anticipated. This data provided some relief but did not change Waller's overall cautious stance. He graded the report a C-plus, acknowledging it as "far from failing but not stellar either."

Waller also mentioned flattening retail sales and a cooling trend in both manufacturing and services sectors as evidence that the higher rates are beginning to curb demand. Additionally, while payroll gains remain robust, metrics such as the rate of workers leaving their jobs indicate that the ultra-tight labor market, which had driven up wages, is showing signs of loosening.

Market Reactions and Future Outlook

Market expectations for monetary policy have shifted significantly this year. Initially, futures markets priced in several rate cuts for 2024. However, persistent high inflation data has pushed these expectations further out, with the first cut now anticipated around September at the earliest. The CME Group’s FedWatch Tool reflects this adjusted outlook, indicating that markets are now betting on two rate cuts before the end of the year.

Waller did not provide specific details on when he expects rate cuts to happen or the extent of such cuts. He remarked, “I will keep that to myself for now,” regarding his expectations for future inflation reports and the necessary progress he wants to see.

In conclusion, while the Federal Reserve appears to be approaching a halt in its rate hiking cycle, Waller’s comments highlight that any potential easing of monetary policy will require sustained evidence of cooling inflation over the coming months. The central bank remains cautious, balancing the need to control inflation without stifling economic growth.