Federal Reserve Governor Calls for July Rate Cut to Prevent Economic Harm

Federal Reserve Board Governor Christopher Waller has emphasized the importance of cutting interest rates, stating that delaying a rate cut beyond July could potentially harm the economy. He believes that tariff-induced inflation is temporary and that current economic data does not justify a delay in cutting rates. Waller's comments come at a time when most Fed officials and economists have been advocating for a wait-and-see approach, particularly regarding inflation data over the summer before making any decisions.

Waller's speech, delivered to the Money Marketeers of New York University, highlighted several key points. He noted that tariffs are one-off increases in the price level and do not cause sustained inflation. Standard central banking practice dictates looking through such price-level effects as long as inflation expectations remain anchored, which they currently are. Waller also pointed out that real GDP growth has been around 1 percent in the first half of this year and is expected to remain soft for the rest of the year, much lower than the median of FOMC participants' estimates of longer-run GDP growth. The unemployment rate stands at 4.1 percent, near the Committee's longer-run estimate, and headline inflation is close to the target at just slightly above 2 percent, excluding tariff effects.

Waller's analysis of the labor market revealed concerns about private-sector payroll growth, which he described as near stall speed. He cited data revisions and other indicators suggesting increased downside risks to the labor market. Waller emphasized that with inflation near the target and limited upside risks, there is no reason to wait until the labor market deteriorates before cutting the policy rate.

The governor also discussed the impact of tariffs on inflation, noting that while they have boosted inflation slightly above the FOMC's 2 percent objective, the underlying inflation remains close to the target. He argued that tariffs are a one-time boost to prices and do not sustainably increase inflation. Waller believes that the current target range for the federal funds rate is 125 to 150 basis points above the participants' median estimates of the longer-run federal funds rate of 3 percent, making it necessary to resume moving toward a neutral policy setting.

Waller's call for a rate cut is based on the evidence of a slowing economy and the risks to the FOMC's employment mandate. He believes that cutting the policy rate by 25 basis points at the next meeting would be appropriate and that further cuts may be necessary if underlying inflation remains in check and the economy continues to grow slowly. Waller's stance contrasts with the views of most Fed officials, who have been advocating for a more cautious approach. However, his arguments highlight the potential risks of delaying a rate cut and the need for proactive measures to support economic growth.