The Federal Reserve's monetary policy committee is approaching a pivotal moment regarding the reduction of its benchmark lending rate, according to Governor Christopher Waller. Recent indicators suggest inflation is stabilizing, yet Waller cautioned that the journey is far from complete. The Federal Open Market Committee undertook a significant tightening of monetary policy, adjusting rates by a total of 525 basis points between March 2022 and July 2023.
However, the committee has opted to maintain current interest rates in its latest deliberations, with the most recent pause occurring last month. In its Summary of Economic Projections in June, a downward revision was made, forecasting just a single rate cut this year, a decrease from the three projected cuts in March. In Waller's prepared remarks for a speech at the Kansas City Fed, he noted, "The data over the past couple of months shows the economy growing at a more moderate pace, labor supply and demand seemingly in balance, and inflation slowing from earlier this year." He expressed optimism about the future, stating, "While I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted." In June, consumer prices in the U.S.
declined, following a period of stagnation the previous month, marking a sequence of positive indicators. Core inflation, excluding volatile food and energy prices, increased by just 0.1%—the slowest rate since the onset of the COVID-19 pandemic. Waller elaborated, "Monthly personal consumption expenditure inflation has recently been running near 2% on an annual basis, but I need to observe more evidence to confirm its sustainability." The current labor market is described as being in a "sweet spot," characterized by rising employment and wage growth that aligns closely with price stability.
Waller acknowledged, "As of today, I perceive there to be a greater risk of unemployment than we have encountered in a long time." Three potential economic scenarios were presented by Waller for the remainder of the year. The first scenario anticipates more favorable consumer inflation data, likely triggering an interest rate cut in the near future.
In the second scenario, the inflation data appears mixed, creating uncertainty around immediate policy adjustments. The third scenario portends a significant resurgence of inflation in the latter half of 2024. Waller concluded, "Given that I believe the first two scenarios hold the highest probability of fruition, I contend that the time for a policy rate reduction is rapidly approaching.
Current data suggests we are on course for a soft landing, and I will look for further data in the upcoming months to affirm this outlook." Additionally, Fed Chair Jerome Powell indicated that policymakers will not postpone interest rate reductions until inflation reaches the 2% target. Market experts are largely anticipating that the Federal Reserve will maintain its current interest rates during the upcoming meeting on July 31.
Furthermore, the likelihood of a 25-basis-point rate cut in September has surged to nearly 94%, up from 70% just a week prior, according to data from the CME FedWatch tool..