Fed Governor Waller Inclined to Lower the Fed Funds Rate at the Next FOMC Meeting

The Gist

During a speech this week, Fed Governor Christopher Waller expressed his belief that monetary policy remains restrictive and that rate cuts should continue over the next year. Specifically, Governor Waller mentioned that he is currently leaning towards supporting a cut to the policy rate during this month's FOMC meeting on December 18th. He supports the cut even though he states, "Recent data have raised the possibility that progress on inflation may be stalling at a level meaningfully above 2 percent." However, he does mention that current forecasts predict inflation to continue towards the Fed's 2.0% target over the medium term.

The Color

GDP

Governor Waller explains that 2.8% real GDP growth during 3Q24 proved strong and that the indication for 4Q24 is that growth will slow. The private sector average estimates a 2.2% expansion during the fourth quarter. He noted that household balance sheets remain strong, supporting consumer spending going forward.

Labor

Waller explained he would not rely as heavily on the monthly jobs report. He noted that the return of Boeing workers, who had been on strike, along with the lingering effects of recent hurricanes, could distort labor data for a few months.  He expects the November jobs report to show an improvement as the Boeing workers ended their strike and there is a reversal of the jobs lost to the hurricanes. Waller further explains that the 4.1% unemployment rate, the share of workers voluntarily quitting their jobs, and the number of job openings indicate a strong yet moderately loose labor market. Lastly, he expressed his satisfaction with wage growth and productivity; wages climbed shy of 4% and productivity 2% over the last two quarters. This would lead to an implicit 2% inflation (4% - 2% = 2%).

Inflation

The Governor regrets that progress on inflation may have stalled in recent months. He highlights that housing services inflation has softened over the October 12-month period, goods inflation has moved to slight deflation, and non-market core services, excluding housing, have increased. However, Waller further explains that he expects housing services inflation to continue moderating and that he does not take much signal from the elevated inflation for other non-market services.

Monetary Policy

Governor Waller explains that monetary policy remains restrictive and that there is plenty of room for further lowering the policy rate. The median of neutral rate projections from FOMC members in September is 3.4% c100bps lower than today's rate. He acknowledges that one could argue for skipping a cut during the December meeting but that he will be watching the data coming in between the speech and the FOMC meeting.

The Takeaways

After the speech, the market increased its expectation of a 25bp cut to the policy rate. The CME FedWatch tool showed a c62% probability of a hike before the speech and c73% after the speech. The probability currently stands at 85%. The data before the meeting will be very relevant as FOMC members will have to read between the lines to determine just how much inflation has stalled above its 2.0% target. Furthermore, a more stubborn inflation may imply a neutral rate higher than the 3.4% median from the FOMC's September estimate. Market participants will receive new estimates with the next monetary policy decision.

You can read the full speech here.