Waller indicated that the Federal Reserve still has room to cut interest rates by 50 to 100 basis points as the labor market weakens and inflation remains under control, but there is no need to rush. The Fed will guide rates toward neutral in a steady and gradual manner. He believes that the absence of a cliff-like drop in employment and stable inflation expectations provide conditions for moderate rate cuts, and the Fed will maintain a balance between supporting growth and controlling inflation.
On the 17th, Federal Reserve Governor Waller stated on CNBC that given the weakening labor market, the Fed still has room to cut interest rates and can gradually reduce the policy rate to a neutral level in a 'steady and gradual' manner.
He emphasized that, based on the current economic outlook, there is 'no need to rush into rate cuts,' and the Fed can proceed at a moderate pace without taking aggressive actions.
Waller pointed out that the current interest rate level is 50 to 100 basis points higher than the neutral rate. Regarding the inflation outlook, he believes that inflation is under control and will not re-accelerate, with expectations that it will continue to decline in the coming months. Meanwhile, he mentioned that although the labor market is showing 'very weak' growth, close to zero, there has been no 'cliff-like drop.'
Waller is currently one of the five final candidates to succeed current Federal Reserve Chair Powell, whose term is set to end in May next year. Waller has confirmed that he is scheduled to be interviewed by Trump this week. His remarks have sent a clear policy signal to the market: The Fed will seek a balance between controlling inflation and supporting employment, responding to the economic slowdown through a mild pace of interest rate cuts rather than adopting panic-driven stimulus measures.
A Robust Path Towards the Neutral Rate
Waller explicitly ruled out the necessity for an urgent and substantial rate cut, advocating for adjusting policies through a steady rhythm. He believes that the current economic outlook allows the Fed to adopt a more relaxed strategy, gradually guiding interest rates from their current restrictive levels to a neutral level.
He specifically quantified the current policy space, noting that the current interest rate level remains 50 to 100 basis points higher than the neutral rate. This gap indicates that even without an economic crisis, the Fed still has ample room for adjustment. Waller emphasized that the Fed's actions need not be drastic, as a moderate pace is sufficient to address the current economic conditions.
Weakness and Support in the Labor Market
Regarding the much-discussed labor market, Waller provided a mixed assessment. He acknowledged that the labor market is currently 'very weak,' with poor job growth, even close to zero. However, he also stressed that there has been no sudden cliff-like drop, indicating that the economy has not fallen into an uncontrollable recession.
Waller noted that the Fed’s previous interest rate cuts have already provided some support to the labor market. Signals from the labor market suggest that the Fed should continue cutting rates. Looking ahead, he hopes that the economic situation in 2026 will improve further, thereby boosting the labor market. As for the long-term impact of artificial intelligence on employment, he stated that it remains unclear at present.
Inflation expectations have receded and remain under control.
Regarding price stability, Waller demonstrated strong confidence. He asserted that inflation would not re-accelerate and believed that inflation had been brought under control, with the Federal Reserve set to maintain this control. Although the current inflation rate remains above the target level, he anticipated that data would further decline in the coming months.
The key lies in the stability of inflation expectations. Waller emphasized that inflation expectations remained stable, providing a basis for policy adjustments. He explicitly stated that the easing of inflation expectations alone was sufficient to support the Federal Reserve in reducing interest rates, indicating that the threshold for rate cuts does not entirely depend on the deterioration of the real economy.
Balance Sheet and External Risks
In addition to interest rate policies, Waller also provided clarification on the management of the Federal Reserve's balance sheet. He explained that the Fed’s new round of asset purchases did not constitute stimulus measures, and market reactions were muted. Currently, bank reserves are nearing adequate levels, and easing regulatory requirements will help further reduce the size of the Federal Reserve's balance sheet.
Regarding external risks, Waller believed that the downside risks posed by tariffs were limited, and it was difficult to attribute the weakening labor market solely to tariffs. As for the interaction between the Federal Reserve and the government, he found no issue with it.
Editor/KOKO