Federal Reserve Governor Christopher J. Waller sounded a note of caution on Monday, expressing concerns about recent inflation data and hinting at a measured approach to interest rate cuts. Despite acknowledging the resilience of the US economy, Waller’s remarks struck a slightly hawkish tone, highlighting the uneven progress made in curbing inflation.
Waller, speaking at a conference at Stanford University, emphasized the economy’s solid footing, pointing to near-maximum employment levels. However, he expressed disappointment with the latest inflation figures, which suggest uneven progress towards the Fed’s 2% target.
While acknowledging the economy’s strength, reflected in a 2.2% annual growth rate in real GDP during the first half of 2024, Waller highlighted the recent inflation uptick as a cause for concern. Despite progress in reducing inflation, recent figures indicate that the path to the Fed’s target is not a smooth one.
Waller also noted the continued strength in consumer spending, with personal consumption expenditures (PCE) averaging around 2.5% this year. He attributed this resilience to pent-up demand for durable goods and home improvements, which was delayed by high interest rates. With interest rates on credit cards and home equity loans beginning to decline, Waller expects consumers to resume purchasing big-ticket items.
Regarding the September jobs report, which far exceeded expectations, Waller stressed the continued health of the labor market, pushing back against speculation of an emergency rate cut earlier this summer. While he anticipates a slowdown in payroll gains, Waller believes job growth will remain robust. However, he cautioned that the October jobs report might be skewed due to temporary disruptions caused by recent hurricanes and the Boeing strike.
Turning to inflation, Waller expressed concern over the likely increase in PCE inflation, the Fed’s preferred measure, in September. He acknowledged the progress made in reducing inflation over the past year and a half but highlighted the uneven nature of this progress. Waller is unsure whether the recent uptick in inflation is a temporary blip or signals more persistent inflationary pressures, and he pledged to closely monitor the data.
Despite these concerns, Waller reaffirmed his outlook for gradual rate reductions over the next year, aligning with the FOMC’s median projection of a 3.4% federal funds rate by the end of 2025. However, he emphasized the uncertainty surrounding the final destination of interest rates.
Waller’s remarks have not significantly altered interest-rate expectations, with the CME FedWatch Tool maintaining the odds of a 25-basis-point rate cut at 86%. However, further expressions of concern about inflation from Fed policymakers and a strong retail sales report on Thursday could increase the likelihood of the Fed holding rates steady.
On Monday, Treasury yields remained relatively stable, with the two-year note yield, sensitive to rate policy, hovering around 4%. The US dollar index (DXY) rose 0.3%, reaching its highest level since late July, while the S&P 500 index gained 0.8%, extending its record highs.