Waller says the time has come to ease monetary policy.
Federal Reserve Board Governor Christopher Waller, who is a member of the Federal Open Market Committee (FOMC), left no doubt where he stands on interest rate cuts, at least right now.
Speaking Thursday evening at the Economic Club of Miami, Waller said it is time to cut rates.
“Since I last spoke on the economy and monetary policy on July 17, economic data have reinforced my view of the outlook and my judgment that the time has come to ease monetary policy and move it to a more neutral stance,” Waller said Thursday.
Waller was one of two FOMC members who voted to reduce rates in July. He was in the minority then, but since that time, the momentum has shifted toward a rate cut. Even Fed Chair Jerome Powell seemed to be leaning in that direction, judging from his remarks at the Jackson Hole conference last Friday.
“In July, I argued that, looking through tariff effects, with underlying inflation near target and the upside risks to inflation limited, the Federal Open Market Committee should not wait until the labor market deteriorates before we cut the policy rate,” Waller said. “Based on all the data in hand, I believe this argument is even stronger today, and that the downside risks to the labor market have increased.”
Factoring out estimates of the temporary effects of import tariffs, Waller said that underlying inflation remains close to the Fed’s 2% target rate.
“While I believe we should have cut in July, I am still hopeful that easing monetary policy at our next meeting can keep the labor market from deteriorating while returning inflation to the FOMC’s goal of 2%,” Waller said. “So, let’s get on with it.”
Rate Cuts Over Last 12 Months
Weakening labor market
Next week, the jobs report for August will be issued, and it has shown weakness in the labor market over the past few months.
“In my July 17 speech, I said that private-sector job creation was nearing stall speed, and the data received since then have put an exclamation point on this statement. I always say that one month is not a trend, but now we have three months of weak job-creation data from the Current Employment Statistics,” Waller said.
Waller said that private-sector job creation has averaged 52,000 in May, June, and July – which is about half the rate in the first quarter of 2025. The numbers are even worse when you include public-sector jobs, Waller said. But he views the private sector as a better indicator of the underlying momentum in the labor market.
There is other data that suggests that labor demand may be on the verge of a sharp decline, like declining wage growth for job switchers and rising unemployment for some cyclically sensitive groups, like teenagers.
“While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly, and I think it is important that the FOMC not wait until such a deterioration is under way and risk falling behind the curve in setting appropriate monetary policy,” he said.
Time is now
The personal consumption expenditures (PCE) inflation data for July came out on Friday, and the results seem to support Waller’s stance. PCE inflation held steady at 2.6% in July, while core PCE ticked up slightly to 2.9%, from 2.8% in June.
While there is uncertainty on how much of an impact tariffs will have on prices, Waller believes they will be borne equally by exporters, importers, and consumers.
“Most forecasts are for 12-month inflation to continue to slowly increase for a couple more months, with monthly tariff effects dissipating by early 2026,” Waller said. “I believe that monetary policy should look through the tariff effects on inflation. With underlying inflation close to 2%, market-based measures of longer-term inflation expectations firmly anchored, and the chances of an undesirable weakening in the labor market increased, proper risk management means the FOMC should be cutting the policy rate now.”
Waller said he supports a 25-basis point cut in September and additional rate cuts over the next three to six months, with the pace of cuts driven by incoming data.
“My eagerness to move now is supported by my view that monetary policy is moderately restrictive,” Waller said. “In June, the median of FOMC participants estimated that the longer-run value of the federal funds rate, akin to what it would be now without restricting or stimulating the economy, is 3%. With the target for the federal funds rate in a range of 4.25% to 4.5%, that means we are 1.25 to 1.50 percentage points above neutral.”
