– Rate Cuts Should Be Done ‘Carefully and Methodically’; ‘Take Our Time’
– Exact Timing of Rate Cuts Not Crucial; Should Await More Inflation Evidence
– Should Start to Think About Tapering Quantitative Tightening Later in 2024
– Shouldn’t Slow Pace of MBS Run-off
By Steven K. Beckner
(MaceNews) – Federal Reserve Governor Christopher Waller indicated Tuesday he is continuing to move closer to supporting interest rate cuts but made clear he is not in any hurry to cut rates or to cut them aggressively.
Waller said he has become more confident that the economy is on course to reduce inflation to 2% without hurting growth or jobs significantly. So, he said the Fed should be able to start cutting rates sometime this year. But he said he would prefer to see the Fed do this “carefully and methodically.”
“If we think we can move it faster we can move it faster,” he said in a virtual appearance for the Brookings Institution in Washington, but he added, “We can take our time and make sure we do this right.”
On the Fed’s balance sheet, Waller said the Fed should start thinking about tapering the pace of Treasury securities run-off later this year, but said he favors continuing to reduce the Fed’s portfolio of mortgage backed securities at the current pace.
Once considered a “hawk,” Waller began sounding more neutral in October, then caused a stir in late November by hinting the Fed might start cutting rates fairly early in 2024. If inflation kept moderating “for several more months … three months, four months, five months … we could start lowering the policy rate just because inflation is lower,” he said.
After Waller’s comments helped spur a furious market rally that significantly eased financial conditions, New York Federal Reserve Bank President John Williams and other officials cautioned against “premature” rate cut speculation.
At its Dec. 12-13 meeting, the Fed’s rate-setting Federal Open Market Committee and Chair Jerome Powell sent mixed messages. The FOMC left the federal funds rate unchanged for a third straight meeting in a target range of 5.25-5.50% and retained a tightening bias. But in their December Summary of Economic Projections, participants projected three 25 basis point rate cuts in 2024.
In his post-FOMC press conference, Powell said the funds rate was “well into restrictive territory” and “at or near its peak,” but gave no indication the FOMC is eager to start easing monetary policy.
“We are prepared to tighten policy further, if appropriate,” he said. “We’re committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation sustainably down to 2% over time and to keeping policy restrictive until we’re confident that inflation is on a path to that objective.”
In his first public comments of the new year, Waller was largely supportive of the Powell approach. He made clear he is ready to cut rates sometime this year, but not necessarily as soon or as rapidly as many on Wall Street continue to hope and expect.
Waller welcomed the mix of economic data in late 2023, noting, “that real gross domestic product (GDP) is expected to have grown between 1 and 2% in the fourth quarter, unemployment is still below 4 percent, and core personal consumption expenditure (PCE) inflation has been running close to 2 percent for the last 6 months.”
“For a macroeconomist, this is almost as good as it gets,” he said in prepared remarks.
“But,” he asked rhetorically, “will it last? Time will tell whether inflation can be sustained on its recent path and allow us to conclude that we have achieved the FOMC’s price-stability goal. Time will tell if this can happen while the labor market still performs above expectations.”
With that caveat, Waller said “the data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024. However, concerns about the sustainability of these data trends require changes in the path of policy to be carefully calibrated and not rushed.”
“In the end, I am feeling more confident that the economy can continue along its current trajectory,” he added.
Waller went on, in his formal presentation, to say that “the progress … on inflation, combined with the data in hand on economic and financial conditions and my outlook has made me more confident than I have been since 2021 that inflation is on a path to 2% ….”
The FOMC’s primary emphasis has been on reducing inflation, he said, but “given the strength of the current labor market the FOMC’s focus now is likely to be more balanced: keeping inflation on a 2% path while also keeping employment near its maximum level.”
“Today, I view the risks to our employment and inflation mandates as being more closely balanced, he continued. “I will be watching for sustained progress on inflation and modest cooling in the labor market that does not harm the economy,”
As of now, Waller said monetary policy is “restrictive” and “set properly” to “continue to put downward pressure on demand to allow us to continue to see moderate inflation readings.”
So, he added, “as long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year …..”
But Waller was vague about when and by how much the FOMC should cut rates.
“Clearly, the timing of cuts and the actual number of cuts in 2024 will depend on the incoming data,” he said. “Risks that would delay or dampen my expectation for cuts this year are that economic activity that seems to have moderated in the fourth quarter of 2023 does not play out; that the balance of supply and demand in the labor market, which improved over 2023, stops improving or reverses; and that the gains on moderating inflation evaporate.”
Waller said he will be paying particular attention to scheduled revisions to the consumer price index, due in mid-February, saying revisions could potentially “change the picture on inflation.”
Whenever the FOMC decides to start cutting rates, he implied it should not do so abruptly or aggressively.
“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully…,” he said. “In many previous cycles, which began after shocks to the economy either threatened or caused a recession, the FOMC cut rates reactively and did so quickly and often by large amounts.”
“This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2%t, I see no reason to move as quickly or cut as rapidly as in the past,” he elaborated. “The healthy state of the economy provides the flexibility to lower the (nominal) policy rate to keep the real policy rate at an appropriate level of tightness.”
“But …. the timing and number of rate cuts will be driven by the incoming data,” he added.
Responding to questions, Waller spoke in the same cautious and contingent vein.
“The key thing is that the economy is doing well, giving us the flexibility to move carefully and methodically …,” he said. “We will watch to see how the data come in, …. whether progress (versus inflation) is being sustained.”
“We really want to see evidence that this progress continues,” Waller went on. “I believe it will, but we have to see that before we can make a decision.”
Asked about the pace of rate cuts once they begin, he replied, “if we think we can move it faster we can move it faster.”
But Waller reiterated that he thinks the FOMC should “move methodically and carefully .… We can take our time to make sure we do this right.”
He declined to say when the FOMC will start the rate-cutting process, saying, “it’s up to the Committee to decide when we’ve seen enough progress.”
Asked whether delaying rate cuts in the face of falling inflation could risk “over tightening” as the real funds rate rises, Waller conceded, “that is one of the risks.”
But Waller said the state of the economy should enable the FOMC to “lower the policy rate to keep the real rate at the right level of tightness … and not damage the economy in any serious way .…”
“I wouldn’t want to start (cutting rates) until we’re all relatively convinced we’re near 2% target ….,” he said. “When we think it’s there and will stay there we can cut … (and) decide how fast to cut .…”
When the FOMC does begin to reduce the funds rate, Waller said “there is no reason why we have to bring it down 50 basis points in one meeting; we can take our time.”
The exact timing of rate cuts shouldn’t matter that much, according to Waller. “Whether it’s six weeks later, it’s kind of hard to believe that’s going to have a huge influence on the economy.”
As for shrinking the Fed’s balance sheet, which has been proceeding at a $95 billion per month pace, Waller said, “sometime this year would be a reasonable time to start thinking about it.”
The Fed could “start tapering the pace” of run-offs of Treasuries “later in 2024,” he said.
But he added, “we don’t need to taper the pace of MBS …. I’m all in favor of letting MBS continue to run off.”