Federal Reserve Governor Calls for July Rate Cut Amid Labor Market Concerns

Federal Reserve Governor Christopher Waller has expressed his view that the economic data could justify a reduction in interest rates as early as next month. This statement comes amidst concerns about the labor market and the potential impact of tariff-fueled inflation. Waller emphasized that policymakers should focus on the underlying trend of inflation, which he believes has been favorable in recent months, rather than being swayed by short-term tariff effects.

Waller noted that while inflation, the unemployment rate, and GDP growth are currently at or near the Fed’s long-run targets, interest rates are still 1.25-1.50 percentage points above the neutral rate. He suggested that rate cuts could be implemented gradually, with the flexibility to pause if necessary. However, he also warned that the labor market, while stable, is not as robust as it was in 2022, citing a 25-year high in the unemployment rate for college graduates and slower job creation.

Waller’s comments come two days after the Federal Open Market Committee (FOMC) unanimously voted to maintain the key borrowing rate within a range of 4.25%-4.5%, a decision that has been in place since December. The committee’s June 18 press release indicated that inflation remains somewhat elevated and the labor market is solid. Despite this, there are signs of weakness in the job market, with the four-week moving average of initial jobless claims reaching its highest level since August 2023. Additionally, the service, retail, and tech industries have seen a significant increase in layoff intentions.

Economists are divided on how the Fed should navigate the current economic uncertainty. Some, like Pantheon Macroeconomics Chief U.S. Economist Samuel Tombs and Senior U.S. Economist Oliver Allen, believe that the FOMC’s forecast of continued low unemployment is overly optimistic. They predict that the unemployment rate will rise to 4.6% in the third quarter and 4.8% in the fourth quarter, exceeding the FOMC’s median forecast of 4.5%.

Other economists, such as EY-Parthenon Chief Economist Gregory Daco, expect that the full effects of tariff-induced price increases will be felt in the summer, leading to a slowdown in economic activity. Daco anticipates that consumer spending and business investment will decelerate significantly, with GDP growth slowing to a near-stall speed by the fourth quarter. Deputy Chief Economist at Oxford Economics Michael Pearce, however, believes that while there is a gradual softening in the labor market, it is not enough to force the Fed into rate cuts in the coming months.

Despite these differing views, Waller’s call for potential rate cuts as early as July highlights the growing concern within the Fed about the labor market’s stability. His remarks underscore the need for a balanced approach that considers both short-term inflationary pressures and long-term economic trends. As the Fed continues to monitor the economic landscape, the possibility of rate cuts in the near future remains a topic of debate among economists and policymakers alike.