Will the US Economy Achieve a 'Soft Landing'... Growing Support for Interest Rate Pace Adjustment Debate

Christopher Waller Fed Board Member: "Caution Needed on Interest Rate Cuts"

Following the recent surge in U.S. employment indicators, the ‘no landing (sustained economic growth)’ scenario has emerged, increasing expectations that the U.S. central bank, the Federal Reserve (Fed), will slow down the pace of interest rate cuts.

Christopher Waller

Christopher Waller, a Fed Board member (photo), stated on the 14th (local time) at an event hosted by the Hoover Institution at Stanford University in California, “Looking at the overall data, the pace of rate cuts should proceed more cautiously than at the September meeting.”

The strongest basis for Waller’s emphasis on gradual rate cuts was the robust U.S. employment data for September. The U.S. Department of Labor announced on the 4th that nonfarm payrolls increased by 254,000 in September compared to the previous month. This was the largest increase in six months since March (310,000). The unemployment rate in September fell to 4.1% from 4.2% in August and was also below experts’ expectations of 4.2%. Meanwhile, Waller described the U.S. Consumer Price Index (CPI) for September as “disappointing,” advocating caution regarding rapid rate cuts. The September CPI rose 2.4% year-on-year, marking the lowest increase in 3 years and 7 months since February 2021, but it was higher than the market forecast of 2.3%.

On the same day, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis, also predicted in a speech at Torcuato Di Tella University in Argentina that the Fed is likely to make small rate cuts going forward. He said, “The Fed is in the final stages of controlling inflation,” but added, “There is growing evidence that the U.S. economy is not on the brink of a sharp recession, as recent labor market data remain strong,” explaining his reasoning.

The market expects the Fed to implement a small cut (0.25 percentage point rate cut) at the upcoming November monetary policy meeting, and there are cautious forecasts that the Fed may even hold rates steady afterward. If the U.S. retail sales data for September, to be released on the 17th, also turn out stronger than expected, the argument for the Fed to slow the pace of rate cuts is likely to gain more traction.

According to the Chicago Mercantile Exchange (CME) FedWatch Tool, the federal funds futures market on this day reflected an 87% probability of a 0.25 percentage point rate cut in November. The probability of holding the benchmark rate steady was calculated at 13%, up 3 percentage points from 10% the previous day.