By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Christopher Waller said Monday that he is “leaning” toward supporting a quarter percentage point cut in short-term interest rates when the Fed holds its mid-December monetary policy meeting but opened the door to a pause in the monetary easing process if incoming economic data so warrant.
Regardless of whether the Fed’s rate-setting Federal Open Market Committee cuts rates for a third time at its Dec. 17-18 meeting, Waller said monetary policy remains “restrictive” and anticipated rate cuts will “continue over the next year until we approach a more neutral setting of the policy rate.”
“There is a ways to go” to get the federal funds rate to a level that is neither expansionary nor contractionary and that allows for lower inflation without hurting the labor market, he told an American Institute for Economic Research (AIER) Monetary Conference.
The Fed began a belated but decisive firming of monetary policy on Sept. 18, when the FOMC slashed the federal funds rate by 50 basis points to a target range of 4.75% to 5.0%.
In their quarterly Summary of Economic Projections, published that day, FOMC participants projected the policy rate would need to be lowered an additional 50 basis points before the end of 2024, and 200 basis points over the next two years. (A fresh set of projections will be released Dec. 18.)
Faced with strong economic activity and lingering “elevated” inflation, the FOMC slowed the pace of tightening on Nov. 7, cutting the funds rate 25 basis points to a target range of 4.5% to 4.75%. Following that rate announcement, Chair Jerome Powell talked about proceeding to cut the funds rate toward “neutral.”
But the path forward for rates is uncertain as the Fed continues its quest for “price stability,” which it defines with a 2% inflation target.
Minutes of the Nov. 7 meeting, released last week, reflected considerable ambivalence about the economic and monetary policy outlook. They say, “participants anticipated that if the data came in about as expected, with inflation continuing to move down sustainably to 2% and the economy remaining near maximum employment, it would likely be appropriate to move gradually toward a more neutral stance of policy over time.”
But while the decision to cut the funds rate by 25 basis points was unanimous, the minutes betray division. They say, “almost all participants agreed that risks to achieving the Committee’s employment and inflation goals remained roughly in balance,” and it was agreed that “monetary policy would need to balance the risks of easing policy too quickly, thereby possibly hindering further progress on inflation, with the risks of easing policy too slowly, thereby unduly weakening economic activity and employment.”
But “some participants noted that the Committee could pause its easing of the policy rate and hold it at a restrictive level if inflation remained elevated,” the minutes reveal, while “some remarked that policy easing could be accelerated if the labor market turned down or economic activity faltered.”
Adding to doubts about the “appropriate” level of the funds rate, the minutes say, “many participants observed that uncertainties concerning the level of the neutral rate of interest complicated the assessment of the degree of restrictiveness of monetary policy and, in their view, made it appropriate to reduce policy restraint gradually.”
Since the Nov. 7 FOMC meeting, Powell and others have spoken of the need to proceed “carefully” and “patiently.”
For his part, Waller was also cautious Monday on how the FOMC should proceed.
Pointing to “significant progress in reducing inflation and evident moderation in the labor market,” he said he and his fellow policymakers decided it made sense “to begin easing monetary policy toward a more neutral setting to limit the risk of unduly weakening the labor market as progress continues toward 2% inflation.”
After 75 basis points of rate cuts, “I believe that monetary policy is still restrictive and putting downward pressure on inflation without creating undesirable weakness in the labor market.” Waller said, adding, “I expect rate cuts to continue over the next year until we approach a more neutral setting of the policy rate.”
But Waller suggested the FOMC must proceed prudently.
“(R)ecent data have raised the possibility that progress on inflation may be stalling at a level meaningfully above 2%,” he said. “This risk has raised concerns that the FOMC should consider holding the policy rate constant at our upcoming meeting to collect more information about the future path of inflation and the economy.”
Pausing rate cuts on Dec. 18 is not Waller’s current inclination, he made clear, but he left open that possibility.
“Based on the economic data in hand today and forecasts that show that inflation will continue on its downward path to 2% over the medium term, at present I lean toward supporting a cut to the policy rate at our December meeting,” he said. “But that decision will depend on whether data that we will receive before then surprises to the upside and alters my forecast for the path of inflation.”
Waller expressed more concern about above-target inflation than about signs of cooling in the labor market, which he attributed in large part to the temporary effects of storms and strikes. Noting that the core price index for personal consumption expenditures (PCE) was up 2.8% from a year earlier in October, he said “the recent data indicate that progress may be stalling.”
“While the recent increase and the level of inflation raise concerns that it may be getting stuck above the FOMC’s 2% goal, let me emphasize that this is a risk but not a certainty,” he continued, adding that he doesn’t want to “overreact.”
Waller said the exact timing of rate cuts is less important than the general trend. “While some near-term aspects of the outlook may be a little unclear, something that is clear is the direction for monetary policy and our policy rate over the medium term, which is down.”
“This downward trajectory reflects the fact that the level of aggregate demand in the economy, relative to supply, has moderated significantly over the past year—it is plainly visible in the data on spending and the labor market,” he continued. “Inflation over that time is also significantly lower, so it makes sense to be moving policy rates toward a more neutral setting.”
“And there is a ways to go,” he went on, noting that in September, the median FOMC projections was that the federal funds rate would be 3.4% at the end of next year.
“That number can and probably will change over time, but whatever the destination, there will be a variety of ways to get there, with the speed and timing of cuts determined by economic conditions we encounter on the way,” he said.
The funds rate is still too high, in Waller’s opinion. “After we cut by 75 basis points, I believe the evidence is strong that policy continues to be significantly restrictive and that cutting again will only mean that we aren’t pressing on the brake pedal quite as hard.”
“There is no indication that the pace of price increases for key service categories such as housing and non-market services should remain at their current levels or increase…,” he said. “Another factor that supports a further rate cut is that the labor market appears to finally be in balance, and we should aim to keep it that way.”
Waller conceded “there is a case for skipping a rate cut at the next meeting,” given that “monthly readings on inflation have moved up noticeably recently, and we don’t know whether this uptick in inflation will persist, or reverse, as we saw a year ago….(O)ne could advocate for not changing the policy rate at our upcoming meeting and adjusting our policy stance in a measured way going forward.”
“In fact, if policymakers’ estimates of the target range at the end of next year are close to correct, then the Committee will most likely be skipping rate cuts multiple times on the way to that destination,” he added.
Between now and the Dec. 17-18 meeting, Waller said he will be watching additional data very closely,” including upcoming employment and inflation reports.
“All of that information will help me decide whether to cut or skip,” he said.
Waller reiterated that “as of today, I am leaning toward continuing the work we have started in returning monetary policy to a more neutral setting.”
“Policy is still restrictive enough that an additional cut at our next meeting will not dramatically change the stance of monetary policy and allow ample scope to later slow the pace of rate cuts, if needed, to maintain progress toward our inflation target,” he elaborated.
However, he didn’t rule out a pause. “That said, if the data we receive between today and the next meeting surprise in a way that suggests our forecasts of slowing inflation and a moderating but still-solid economy are wrong, then I will be supportive of holding the policy rate constant.”
In other comments, Waller said that as it reviews its longer term monetary policy framework the FOMC could decide on a ”very different strategy than what we have in place now.” He didn’t elaborate but noted that when the current framework was put in place it came on the heels of a long period in which low inflation and a lower real interest rate was causing the Fed to be concerned about the funds rate falling to its zero lower bound.
More recently, Fed officials have revised higher their estimate of the real funds rate. How much higher it might go will depend in good part on “fiscal policy” and how demand for and supply of Treasury securities affect yields, Waller said.
Earlier, Atlanta Federal Reserve President Raphael Bostic said he voted for both rate cuts because “the risks to achieving the Committee’s dual mandates of maximum employment and price stability have shifted such that they are roughly in balance, so we likewise
should begin shifting monetary policy toward a stance that neither stimulates nor restrains
economic activity.”
But Bostic gave little indication how he will vote at future meetings in an essay published by the Atlanta Fed.
Through the final weeks of this year and into 2025, …. monetary policymakers have a great deal to ponder,” he wrote. “A few core questions frame my policy thinking. How restrictive is monetary policy? How restrictive does it need to be to keep inflation declining toward 2 percent? On the flip side, how quickly and by how much do we need to lower the federal funds rate to ensure we don’t seriously damage labor markets and inflict undue pain on the American people?”
Bostic did allow for more rapid easing under certain conditions, writing, “the salient question for me … is whether the labor market is cooling more dramatically than I had imagined when I developed my outlook for the economy.”
“The answer has important implications for monetary policy, because if conditions in the labor market are in fact worse than my Committee colleagues and I thought a few months ago, then that probably bolsters the case for continuing to remove policy restrictiveness, and perhaps argues that we should do so more aggressively,” he added.