Federal Reserve's Waller Signals Preemptive Rate Cuts Amidst Cooling Labor Market

Federal Reserve Governor Christopher Waller on Friday expressed support for cutting rates at the upcoming policy meeting and said he is open to more significant rate cuts if necessary.

Waller, one of the most influential officials at the Federal Reserve, explicitly mentioned the possibility of "preemptive" rate cuts. He indicated his support for a rate reduction at the September FOMC meeting, pointing to the importance of a cooling labor market.

"Considering the continued progress on inflation and the cooling labor market, I believe it is time to lower the target range for the federal funds rate at the upcoming Federal Reserve meeting," Waller said.

However, Waller did not specify the exact rate or frequency of cuts he supports. He emphasized that the speed and overall downward adjustment of policy rates will be decisions for the future.

Despite not directly saying it, Waller sent a dovish signal. He noted willing to accept that the Fed might need to take aggressive measures to keep the labor market functioning well as inflation moves toward the Fed’s 2% target.

"If appropriate, I will advocate for "preemptive" rate cuts and remain open to discussing the magnitude and speed of those cuts," Waller stated. "If data shows a need for more significant rate cuts, I would support that. If the U.S. labor market deteriorates faster than expected, the Fed should take more substantial rate cuts to increase the likelihood of a soft landing."

Waller doesn't see the first rate cut as a one-off event. "As inflation and employment approach our long-term goals, and with the labor market slowing, a series of rate cuts may be appropriate," he added.

This stance was underscored before the release of key data by the U.S. Bureau of Labor Statistics, showing mixed updates on the nonfarm payrolls for August. The U.S. economy added 142,000 jobs in August, missing expectations of 165,000, and the July figure was revised down significantly from 114,000 to 89,000, with June numbers also revised down.

The unemployment rate fell to 4.2% in August from 4.3% in July, aligning with expectations, marking the first decline since March. Meanwhile, average hourly earnings rose by 3.8% year-over-year in August, slightly above the 3.7% forecast, and increased by 0.4% month-over-month, exceeding projections of 0.3%.

Inflation, Waller believes, is on track to reach the Fed’s 2% objective.

Moreover, Waller affirmed that the U.S. economy is neither in a recession nor expected to head towards one.

Following Waller's dovish comments, traders boosted their bets on future monetary easing. The yield on the 10-year U.S. Treasury note dipped in response, hitting a new daily low of 3.6443%, down 8.26 basis points overall. Concurrently, stock market losses narrowed.

Waller's comments delivered the clearest signal yet of the Federal Reserve's intentions relative to other policymakers who have recently pushed for quick easing of monetary policy. He reiterated language used by Federal Reserve Chairman Jerome Powell in late August, indicating that "the time has come" to adjust monetary policy.

Having taken Waller's dovish remarks into account, the market anticipations for a stimulative Fed policy stance have risen, igniting more discussions on the expected trajectory of interest rates moving forward.

In conclusion, while Waller’s statements have set a clearer path towards potential rate cuts, the specific timeline and magnitude remain data-dependent as the Fed navigates inflation and labor market dynamics.