Christopher Waller, a Federal Reserve (Fed) governor known as a prominent hawk (favoring monetary tightening), acknowledged the need for a rate cut within this year on the 16th (local time) but warned that it would not happen as quickly as the market expects.
At an event hosted by the Brookings Institution, Governor Waller said, "If inflation does not rebound or rise again, we could lower rates this year." He noted that while the U.S. economy has shown steady growth and employment recently, inflation has been slowing down, describing the situation as "almost as good as it gets." However, he added, "It is questionable whether this will continue," emphasizing that Fed officials would want to see additional evidence that inflation is on track to meet the 2% target before cutting rates.
Waller stated, "When the appropriate time comes to lower rates, we believe we can take our time and proceed cautiously," pointing out that "in many previous cycles, rate cuts were relatively quick and large, but in this cycle, there is no reason to cut rates quickly." This comment dampened market expectations that the first rate cut could happen as early as March.
According to the Chicago Mercantile Exchange (CME) FedWatch tool, the futures market currently prices in about a 65% chance that the Fed will cut rates by at least 0.25 percentage points at the Federal Open Market Committee (FOMC) meeting in March, following a hold in January. This probability had weakened from around 72% before Waller's remarks were made public.
On the day of his remarks, Waller did not specify the timing or conditions for a rate cut. He responded that the timing and pace of cuts would depend on the inflation trajectory and economic indicators. Krishna Guha, an analyst at investment bank Evercore ISI, assessed in an investor memo that Waller’s comments might disappoint investors compared to those in November last year. He said, "We interpret Waller’s remarks as indicating he does not expect to push for a rate cut in March," adding, "This aligns with our forecast that the first rate cut will occur in May or June."
Waller, who holds voting rights on rate decisions at the FOMC, is considered a hawkish figure within the Fed. However, in a speech at the end of November last year, he shifted his stance by stating that "the current monetary policy is appropriate for achieving the 2% inflation target," playing a key role in rapidly spreading expectations of a pivot in financial markets.
Accordingly, investors’ attention is focused on inflation data as well as retail sales and the Fed’s Beige Book on economic conditions, which will be released this week. Retail sales are considered a pillar accounting for two-thirds of the U.S. real economy and a comprehensive gauge of economic health. If December consumer spending remains robust, it could strengthen hawkish voices advocating for maintaining high rates for the time being. Speeches by Fed’s third-ranking officials, New York Fed President John Williams and Atlanta Fed President Raphael Bostic, are also scheduled during the week. Earlier, President Bostic indicated that rate cuts might only be possible in the third quarter.
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