Christopher Waller, a prominent hawkish (favoring monetary tightening) member of the U.S. Federal Reserve (Fed), stated on the 28th (local time) that if the trend of slowing inflation continues, the Fed could begin cutting interest rates within a few months. He also expressed growing confidence that the current monetary policy is appropriate for achieving the 2% inflation target.
At an event hosted by the American Enterprise Institute (AEI) think tank in Washington, D.C., Waller said, "The inflation rate is moving at almost the pace I expected," adding, "If this continues for the next three, four, or five months, we could start lowering policy rates simply because inflation has decreased." He emphasized, "This has nothing to do with efforts to stimulate the economy," and noted, "There is no reason for us to say we need to keep rates high."
In his prepared remarks released before the event, Waller did not mention the possibility of rate cuts. He expressed concern, saying, "Currently, the indicators are encouraging regarding early signs of economic slowdown in the fourth quarter, but inflation remains high," and added, "It is too early to say whether the slowdown we are seeing will persist." However, he also stated, "The current monetary policy is increasingly believed to be in the right position to slow the economy and reduce inflation to the 2% target," and noted that economic data released over the coming months will provide answers.
With Waller, a leading hawkish figure, directly mentioning the possibility of rate cuts, expectations for a pivot in the financial markets immediately strengthened. According to the Chicago Mercantile Exchange (CME) FedWatch tool, federal funds futures on that day priced in more than a 65% chance that the Fed will cut rates by at least 0.25 percentage points by May next year, a significant increase from the 50% range the previous day.
In the New York bond market, Treasury yields fell. The benchmark 10-year U.S. Treasury yield dropped to around 4.35% following Waller’s remarks. The 2-year yield, which is sensitive to monetary policy, also fell to about 4.75%.
On the same day, Waller welcomed signs of economic slowdown due to cumulative tightening across sectors such as retail sales, the labor market, and manufacturing, calling them "encouraging." The title of his speech changed from last month’s hawkish "Something's Got to Give" to "Something Appears to Be Giving" this time.
On the other hand, Michelle Bowman, a Fed governor who also spoke publicly that day, reiterated the need for further rate hikes to achieve the inflation target. At a Bankers Association event, Bowman said, "My baseline economic outlook is that additional rate increases are necessary to bring inflation back to the 2% target in a timely manner and to maintain sufficiently restrictive policy." Since March last year, the Fed has raised U.S. interest rates 11 times to the current range of 5.25% to 5.5%.
This week, the Fed’s closely watched inflation indicator, the Personal Consumption Expenditures (PCE) price index, will be released. The core PCE for October, scheduled for release on the 30th, is expected to show a 3.5% increase year-over-year and a 0.2% rise month-over-month, continuing the slowdown trend. If the slowdown trend is confirmed again in the PCE following the Consumer Price Index (CPI), expectations for rate cuts next year are likely to strengthen further. Ahead of the final Federal Open Market Committee (FOMC) meeting of the year in December, Fed Chair Jerome Powell’s discussion remarks will also be released on the 1st.
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