Christopher Waller, a Federal Reserve Governor, hints at a possible decline in interest rates in the near future, subject to no significant surprises in inflation and employment figures.
During a session organized at the Kansas City Fed, Waller conveyed his optimism regarding the current economic situation, indicating that he will closely monitor forthcoming data to reinforce his assessment. He is of the opinion that, though the final decision has not been made, the timing for a rate reduction is drawing near.
Despite the chances of a rate cut in the upcoming Federal Open Market Committee meeting this month appearing slim, Waller’s statements suggest a higher likelihood of a reduction happening in September.
The recent data, displaying a dip in inflation rates, has led central bankers to adopt a more upbeat stance on the economic future.
Waller outlined three potential future scenarios: one where positive inflation figures justify an imminent rate cut, another where data fluctuates but leans towards moderation, and a third scenario where intensified inflation pushes the Fed towards a stricter monetary policy.
Considering unexpectedly robust inflation as the least probable scenario, Waller perceives that a rate cut is imminent given the increased probability of the first two scenarios materializing.
He did mention that while financial markets concentrate on the timing of a rate cut, FOMC members don’t prioritize a specific meeting but instead await the ideal conditions.
Waller’s comments are noteworthy as he has been regarded as a more hawkish figure in the FOMC this year, advocating for more stringent monetary policies amidst concerns of lingering inflation.
In his earlier statements in May, Waller implied that rate reductions were still a few months away, pending more compelling evidence of receding inflation. His recent speech suggests that the prerequisites for a cut are almost fulfilled.
He emphasized that the job market is flourishing with expanding payrolls and subsiding wage increases, accompanied by a dip in the consumer price index in June and the lowest yearly core price rate since April 2021.
Waller indicated that recent data aligns more closely with the consistent progress made in curbing inflation witnessed last year and moving towards the FOMC’s price stabilization objective.
Similar sentiments were echoed by New York Fed President John Williams, who observed that inflation figures are consistently moving in the right direction, edging towards the desired disinflationary trend.
Market expectations also reflect a more accommodative approach by the Fed.
Traders in the fed funds futures market are projecting a quarter percentage point rate reduction in September followed by possibly another cut before the end of the year, according to the CME Group’s FedWatch measure.
The fed funds futures contracts hint at a 4.62% rate by year-end, approximately 0.6 percentage points lower than the current level.
Image Source: Peterson Institute for International Economics @ YouTube
