Fed’s Waller Advocates for Rate Cuts Amidst Inflation Watch By Quiver Quantitative

Quiver Quantitative – In a recent virtual event hosted by the Brookings Institution, Federal Reserve Governor Christopher Waller emphasized a cautious approach to cutting interest rates, suggesting the possibility of such measures later this year, provided inflation does not surge. Waller’s remarks offer insight into the Fed’s tentative plans to ease policy this year. He advocates for a methodical and careful reduction in rates, diverging from market expectations of up to six rate cuts. Waller’s stance reflects a departure from the Fed’s rapid rate cut responses to past economic shocks, aligning with current economic conditions where inflation is gradually declining towards the 2% target amidst robust economic activity and labor markets.

Treasury yields reacted swiftly to Waller’s statements, with a noticeable jump, as traders adjusted their expectations regarding the immediacy and extent of the anticipated rate cuts. Waller indicated that the timing and magnitude of rate cuts would be data-dependent. His comments underscored a balanced approach, aiming to avoid overly restrictive measures while ensuring the Fed’s 2% inflation target is within reach before initiating rate reductions. He pointed out the need for moderation in consumption and hiring, along with consistent low inflation readings, as prerequisites for considering a rate cut. Waller’s cautious tone suggests a deliberate and flexible approach to monetary policy adjustments, allowing for a gradual calibration of the real rate cut based on incoming data.

Market Overview:
-Mixed reaction to Fed Governor Waller’s comments on rate cuts.
-Bond yields jumped as optimism for early cuts faded.
-Markets focused on incoming economic data for clues on Fed’s timeline.

Key Points:
-Waller sees rate cuts possible this year if inflation stays under control.
-Cautious and gradual approach to easing favored, pushing back against aggressive market expectations.
-Timing and magnitude of cuts depend on incoming data, with no rush expected.
-Inflation moderation, slower labor market growth, and continued low monthly inflation readings key for justifying cuts.
-Balance sheet runoff potentially slowing later in the year.

Looking Ahead:
-Key data releases: China GDP, Eurozone CPI, US retail sales, industrial production, and Beige Book.
-Central bank speeches and Davos discussions further shaping policy outlook.
-Fed likely to remain data-driven, with flexibility to adjust based on economic developments.

Inflation trends and labor market data remain central to Waller’s outlook. He expressed confidence that the Fed is close to achieving its 2% inflation goal, but emphasized the necessity for more data to confirm a sustainable downward trend in inflation. Waller referred to the December jobs report as an anomaly in an otherwise moderating trend, anticipating potential downward revisions. He also noted the recent uptick in inflation, driven by persistent services costs and a halt in the decline of goods prices, as factors to monitor closely. Waller described the current financial conditions as restrictive and advocated for a cautious policy setting to prevent over-tightening. He believes the existing policy stance is appropriate, maintaining enough pressure to continue moderating inflation.

Economists have varied interpretations of Waller’s statements. Bank of America’s Michael Gapen views Waller’s language as indicative of an inclination towards initiating rate cuts, though not strongly favoring an immediate cut in March. Goldman Sachs economists perceive Waller’s comments as increasing the likelihood of a later start to rate cuts than previously anticipated, with a potentially quarterly pace from the onset. Waller’s assessment of the December jobs report as “largely noise” and his anticipation of upcoming CPI revisions suggest a data-driven and cautiously optimistic approach to future policy decisions.

This article was originally published on Quiver Quantitative