Chances of a Fed Rate Cut!
Fed Governor Christopher Waller said the US central bank needs to cut interest rates at its December 9-10 meeting. He “Supports a quarter-percentage-point rate cut at the December 9-10 Fed meeting” and “Makes the case for continued rate cuts” due to concerns about a weakening labor market. Waller believes this move would “provide additional insurance for the labor market” at a time when “the US labor market is weak, its pace has nearly stalled” and “Concerns about restrictive monetary policy are weighing on the economy.”
On inflation and growth, Waller stated, “Our underlying inflation is close to our 2% target” and “Inflation expectations are well-contained.” He added, “Tariffs are a one-off price level shock; we don’t foresee any factors that could cause inflation to accelerate.” However, at the same time, “US GDP growth has slowed in the second half of 2025” and “Dark consumer sentiment is consistent with reports from companies of reduced demand.” He also highlighted that “Housing and auto affordability pose ongoing challenges for consumers, weighing on spending growth,” and that despite the lag in official data, “the overwhelming amount of data paints an ‘actionable picture’ of the economy, despite the lag in official data.” Therefore, “It’s unlikely that any data, including the upcoming jobs report, will change the view that another interest rate cut is needed,” unless “If we see a rebound in the job market, there will be less need for insurance cuts.”
Waller focused heavily on the stress in the job market. He admitted, “Regarding the weak data, I’m hearing more and more about layoff plans” and “We should be more concerned about the labor market than the current runaway inflation.” He “Declined to comment on whether President Trump’s remarks on interest rates are beneficial to the Fed.” On the corporate side, Waller “heard that companies are paying for AI investments by not hiring” and “Companies are saying that low- and middle-income households are not spending, which is hampering hiring.” He bluntly stated, "A 25 basis point rate cut won't restore job growth to its former level," but it's still important because "Monetary conditions are loose for corporate America, but not for ordinary households" and "The situation is not good for the bottom of the income distribution." Even in the real estate sector, "Homebuilders say weak job prospects are holding back buyers," and "It will be difficult to judge how accurate the October jobs data will be."
Regarding future policy direction, Waller warned that "We may soon see the smallest group you've ever seen from the Fed," and "A very close vote could leave people uncertain about the outcome of the next vote," especially since "the neutral interest rate level is not yet clear." On assets, he assessed that "Our balance sheet is quite appropriate. Interest rates are creeping up in the market, suggesting we're close to reaching a safe level of foreign exchange reserves," and "I don't see the balance sheet staying where it is; demand for foreign exchange reserves will push it up. It may only take a month or two before the balance sheet grows again." On the fiscal front, he assessed that "A 6% budget deficit is unsustainable in the long run but unlikely to cause a crisis in the next 5 years" and "We haven't seen any market signals of concerns from higher budget deficits." Waller admitted that "I would have stopped QE sooner" and that "Financial markets can afford to 'take a hit.'" Looking ahead, "I don't expect a major change in fiscal stimulus next year," and he said, "The Fed needs a better reason than inflation, after being above target for 5 years, not to cut rates." Meanwhile, "Business investment is down if you exclude AI," and "Financial market easing is not part of my mandate; I'm focused on inflation and the labor market." He concluded with a cautionary note: "Past experience makes the Fed more cautious about a 50-bp cut." (asd)
Source: Bloomberg.com
