Fed's Waller Says Policy Still Restrictive, More Easing Needed

Federal Reserve Governor Christopher Waller dissented at the recent Federal Open Market Committee (FOMC) meeting, arguing that a 25-basis-point rate cut was necessary. The Fed opted to keep the policy rate in the range of 3.5% to 3.75%, citing an improved economic outlook.

Waller emphasized that economic data still indicate the need for additional monetary easing. He noted that inflation, excluding the effects of President Trump’s tariffs, is near the Fed’s 2% target.

The labor market remains a key concern for Waller. He highlighted planned layoffs in 2026 and a soft labor market as significant risks that could lead to economic deterioration.

Why the Move Happened

Waller’s dissent reflects his long-standing advocacy for rate cuts. For months, he has pointed to warning signs in the employment outlook and a benign inflation outlook.

The Fed’s decision to hold rates steady was influenced by a mix of views among officials. Seven of the 19 policymakers indicated no further cuts for at least a year, while others called for modest reductions.

President Donald Trump has pushed for immediate and steep reductions in the Fed’s policy rate. His stance has created pressure on the central bank, especially with the nomination of a new Fed chair approaching.

How Markets Responded

Market reactions to the Fed’s decision were mixed. Traders anticipate up to two rate cuts in 2026, according to the CME Group’s FedWatch tool.

The 10-year Treasury yield rose slightly, trading at 4.26%, while the 2-year note rate increased to 3.59%. This suggests limited immediate relief for consumers seeking lower borrowing costs.

Investors are watching the impact of the new Fed chair’s appointment on policy direction. Prediction markets favor Rick Rieder of BlackRock as the frontrunner to succeed Jerome Powell.

What Analysts Are Watching

Analysts are divided on the Fed’s next move. Some expect only one rate cut in 2026, citing the economy's ability to operate with current rates.

Stephen Brown of Capital Economics argued that a lower policy rate mixed with higher term premiums on long-term debt could benefit the private sector. However, bond market reactions remain cautious.

Investors are also monitoring the impact of AI on economic growth and the labor market. The rollout of artificial intelligence is expected to support GDP growth and stabilize the labor market.

Kevin Warsh, the former Fed governor and potential new chair, has aligned with calls for lower interest rates. His appointment could signal a more accommodative policy stance, though challenges remain in convincing colleagues.