“As long as inflation does not rebound and remains high, I believe the (Federal Open Market Committee) will be able to lower the target range for the federal funds rate this year,” Waller said in prepared remarks to an audience at the Brookings Institution. institution.
He added: “When the time comes to start lowering interest rates, I believe they can and should be lowered systematically and carefully.” “In many previous cycles…interest rates have been cut reactively, and they have done so quickly and often by large amounts. However, in this cycle…I see no reason to move as quickly or cut as quickly as in the past.” “.
Market prices on Tuesday morning indicated a 71% probability that the Federal Open Market Committee will start cutting in March, according to CME Group’s FedWatch gauge. In fact, traders increased their 2024 forecasts and added another cut this week, bringing the expected total to seven quarter-point declines by the end of the year.
At their meeting in December, Fed officials indicated the possibility of three cuts this year. The benchmark federal funds rate currently sits in a target range of 5.25%-5.5%.
Speaking about lowering interest rates, Waller pointed to the progress made against inflation that has not come at the expense of the labor market.
Stocks settled into sharply negative territory after Waller’s comments, while Treasury yields rose.
While 12-month inflation is still well above the Fed’s 2% target, measures over shorter time frames such as six months are much closer to the target. For example, the core personal consumption expenditures price index, one of the Fed’s favorite measures, shows annual inflation of 3.2%, and the six-month measure is about 1.9%.
Meanwhile, unemployment remained below 4%, and GDP grew at a rate that defied Wall Street’s expectations of a recession.
“For a macroeconomist, this is almost as good as he can get. But will it last?” Waller said. “Time will tell whether inflation can be maintained on its recent path and will allow us to conclude that we have achieved the price stability goal set by the FOMC. Time will tell whether this can happen while the labor market performance remains above expectations.”
While the Fed grapples with the dilemma of not tightening monetary policy enough, allowing inflation to expand and tightening too much, stifling growth, Waller said those risks have become more balanced.
In fact, he said, with the level of employment being so low compared to the size of the workforce, the Fed now runs the risk of doing too much.
“Therefore, from now on, policy setting should proceed with more caution to avoid over-tightening,” he said.
Waller said he believes the Fed is “close to achieving” its 2% inflation target, “but I will need more information” before declaring victory. One data point he said he would particularly focus on is upcoming revisions to the Labor Department’s Consumer Price Index inflation measure.