Christopher Waller, U.S. Federal Reserve Governor, during a Fed listening event in Washington, D.C., on Friday, September 23, 2022.
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Federal Reserve Governor Christopher Waller said Thursday he would need to see more evidence that inflation is cooling before he would be willing to support interest rate cuts.
In a political speech delivered in Minneapolis, he concluded by asking: “What is impulsiveness?” Regarding the interest rate cut, the central bank official said that January's higher-than-expected inflation readings raised questions about where prices are headed and how the Fed should respond.
“Last week's high CPI reading may just be a bump in the road, but it may also be a warning that the significant progress in inflation over the past year may be stalling,” Waller said in prepared remarks.
While he said he still expects the Federal Open Market Committee to start cutting interest rates at some point this year, Waller said he sees “mostly upside risks” to his forecast that inflation will fall to the Fed's 2% target.
He added that there was little sign that inflation would fall below 2% anytime soon based on strong 3.3% annual growth in GDP and employment, with few signs of a potential recession on the horizon. Waller is a permanent voting member of the Federal Open Market Committee.
“This makes the decision to be patient as we begin to ease policy simpler than it might otherwise be,” Waller said. “I will need to see at least two more months of inflation data before I can judge whether January is a speed bump or a pothole.”
These statements are consistent with the central bank's general sentiment that although further rate hikes are unlikely, the timing and pace of cuts are uncertain.
Inflation data Waller referred to showed the CPI rose 0.3% in January and rose 3.1% from the same time last year, both higher than expected. Excluding food and energy, the core CPI rose at an annual pace of 3.9%, after rising 0.4% on a monthly basis.
Reading through the data, Waller said core personal consumption expenditures prices, the Fed's preferred measure of inflation, are likely to reflect a 2.8% increase over 12 months when they are released later this month.
Such high readings make the hold case stronger, he said, noting that he would monitor data on consumer spending, employment, wages and compensation for more clues about inflation. Retail sales fell an unexpected 0.8% in January while payroll growth rose by 353,000 during the month, well above expectations.
“I still expect that it will be appropriate at some point this year to start easing monetary policy, but the onset of policy easing and the number of interest rate cuts will depend on the incoming data,” Waller said. “The bottom line is that I think the committee can wait a little longer to ease monetary policy.”
Just a few weeks ago, markets were anticipating a high probability of a rate cut when the Fed next meets on March 19-20, according to federal funds futures bets measured by CME Group. However, that has been scaled back to the June meeting, with the likelihood that the FOMC will wait until July rising to about 1 in 3.
Earlier in the day, Fed Vice Chairman Philip Jefferson was noncommittal about the pace of the cuts, saying only that he expected easing “later this year” without providing a timeline.
Governor Lisa Cook also spoke and noted the progress the Federal Reserve has made in its efforts to reduce inflation without impacting the economy.
However, while she also expects a cut this year, Cook said, she “would like to have more confidence” that inflation is on a sustainable path back to 2% before moving on.
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