The U.S. is “within striking distance” of the Federal Reserve’s 2% inflation goal, but the central bank should not rush towards cuts in its benchmark interest rate until it is clear lower inflation will be sustained, Fed Governor Christopher Waller said on Tuesday.
And regardless of when rate cuts begin, Waller said they should proceed “methodically and carefully,” not come through the sort of large, fast reductions used when the Fed is trying to bail out the economy from a shock or a pending downturn.
“With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past,” said Waller, a counter to market expectations that the Fed will start cutting rates at its March meeting and lop off perhaps 1.5 percentage points from the benchmark policy rate by the end of the year.
The Fed has left the policy rate in the current range of 5.25% to 5.5% since July.
If Waller expressed a more careful approach to coming cuts, his remarks also showed the fulsome debate taking shape at the Fed, with his initial commentary on the appropriate pace of cuts, and his acknowledgement that the emphasis at the central bank has shifted from controlling inflation alone to managing a more balanced set of risks to ensure the maximum employment goal stays in hand as well.
“While the emphasis of policy…has been on pushing down inflation, given the strength of the current labor market the FOMC’s focus now is likely to be more balanced: keeping inflation on a 2% path while also keeping employment near its maximum level. Today, I view the risks to our employment and inflation mandates as being more closely balanced,” he said.
Recent data “is almost as good as it gets” for the central bank with economic growth gradually slowing, the unemployment rate remaining low, and important measures of inflation now hitting the Fed’s 2% target for the past six months, said Waller, a key architect of aggressive Fed tightening who now agrees the time for cuts is likely approaching.
“The data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024,” Waller said in remarks prepared for deliver to a Brookings Institution event. However, he cautioned that until any risk has passed that inflation will resurge or recent trends reverse, policy changes should “be carefully calibrated and not rushed.”
“I am becoming more confident that we are within striking distance of achieving a sustainable level of 2% PCE inflation. I think we are close,” Waller said, referring to the personal consumption expenditures price index that the Fed uses to set its inflation target.
“But I will need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably toward our inflation goal,” before backing rate cuts, he said.
