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Fed's Waller: The First Rate Cut Will Be In The 'Not-too-distant Future' If Inflation Stays Cool

AInvestThursday, Jul 18, 2024 3:56 am ET
2min read

Federal Reserve Governor Christopher Waller said on Wednesday that a rate cut could be coming soon as long as there are no major surprises in inflation and employment.

I believe current data are consistent with achieving a 'soft landing,' and I will be looking for data over the next couple months to buttress this view, Waller said in a speech on Wednesday. While I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.

Consistent with other policymakers' statements, Waller's view suggests that it is unlikely that the Federal Open Market Committee (FOMC) will cut rates later this month. Still, there is a strong possibility in September.

Data shows that after inflation unexpectedly rose in the first three months of 2024, inflation has eased in recent months, making Federal Reserve officials more optimistic.

Waller outlined three possible scenarios that could occur in the coming period: The first scenario is that inflation data becomes more positive, justifying a rate cut in the not-too-distant future; The second is that inflation data fluctuates, but still points to a slowdown; The third scenario is that inflation rises, forcing the Federal Reserve to adopt a tighter policy stance.

Among these three scenarios, Waller believes that the third scenario - a surprise rise in inflation - is the least likely to occur.

Waller said the labor market is at a sweet spot, with employment increasing and wage growth cooling. At the same time, price data also sends a positive signal, with the U.S. Consumer Price Index (CPI) falling by 0.1% in June month-on-month, and the core CPI rising by 3.3% year-on-year, falling to the lowest level since April 2021.

After disappointing data to begin 2024, we now have a couple of months of data that I view as being more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC's price stability goal. The evidence is mounting that the first quarter inflation data may have been an aberration and that the effects of tighter monetary policy have corralled high inflation, he said.

It is particularly noteworthy that Waller is one of the more hawkish FOMC members this year, and he was originally concerned that inflation would be more persistent than expected.

The Federal Reserve's third-ranking official, New York Federal Reserve President John Williams, also made similar comments on Tuesday. He said that if the recent trend of slowing inflation can continue, it may be necessary to cut interest rates in the coming months, but it may not be done at the meeting two weeks later.

Former Dallas Federal Reserve President Robert Kaplan also said recently that given progress in fighting inflation, the Federal Reserve may cut rates in September, but this does not mean the beginning of a comprehensive rate-cutting cycle.

The Federal Reserve's observation tool at the Chicago Mercantile Exchange shows that Federal funds futures market traders are betting that the Federal Reserve will cut rates by 25 basis points in September and at least once more by the end of the year.

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