Fed's Waller Expects Milder Inflation, More Rate Cuts

Federal Reserve Board Member Christopher Waller has expressed optimism about the trajectory of inflation, which influences his stance on further rate cuts. In a speech on January 10, 2025, Waller stated, "I believe that inflation will continue to make progress toward our 2 percent goal over the medium term and that further reductions will be appropriate." Waller's optimism is based on several factors:

1. Uneven progress but overall disinflation: Waller acknowledges that progress on inflation has been uneven but argues that disinflation is more apparent when recent upticks are smoothed out. He points to the six-month percent change in core personal consumption expenditures (PCE) prices, which was 2.4 percent at an annual rate for November 2024 and has been moving down toward 2 percent over the course of the year.
2. Lower-than-expected monthly inflation reading: The monthly reading for November 2024 came in much lower than expected at 0.11 percent, after rising 0.26 percent in October. This lower reading suggests that inflation may be stabilizing or even decreasing.
3. Imputed prices driving inflation: Waller notes that inflation in 2024 has been largely driven by increases in imputed prices, such as housing services and nonmarket services, which are estimated rather than directly observed. These two categories represent about one-third of the core PCE basket. When looking at the prices associated with the other two-thirds of core PCE, they increased less than 2 percent over the past 12 months through November 2024.
4. Higher inflation readings dropping out: Waller expects that the higher inflation readings from early in 2024 will begin to drop out of inflation numbers in January 2025, leading to a significant step-down in the 12-month inflation numbers through March 2025, further supporting his view of continued disinflation.

Given these factors, Waller believes that inflation will continue to make progress toward the 2 percent goal, and he supports continuing to cut the policy rate in 2025. The pace of these cuts will depend on the progress made on inflation while keeping the labor market from weakening. Based on the most recent Summary of Economic Projections, the median of policymakers' expected appropriate policy rate this year implies two 25 basis point cuts. However, Waller notes that the range of views is quite large, from no cuts to as many as five cuts for different FOMC participants. Ultimately, the extent of further easing will depend on what the data tell us about progress toward 2 percent inflation.



Geopolitical conflicts and tariff proposals could potentially impact Waller's assessment of appropriate monetary policy, although he expects these factors to have limited or non-persistent effects on inflation. He acknowledges that geopolitical conflicts could boost prices, as they have in the past, and that tariff proposals raise the possibility of a new source of upward pressure on inflation. However, Waller expects these factors to have limited or non-persistent effects on inflation, and he does not anticipate them significantly altering his view on appropriate monetary policy.



In conclusion, Waller's optimism about the trajectory of inflation influences his stance on further rate cuts. He expects milder inflation and supports continuing to cut the policy rate in 2025, with the pace of cuts depending on progress made on inflation and labor market conditions. While geopolitical conflicts and tariff proposals could potentially impact his assessment, Waller expects these factors to have limited or non-persistent effects on inflation, and he does not foresee them significantly influencing his view on appropriate monetary policy.