The Federal Reserve is likely to be able to cut interest rates this year, but there is no need for policy to be “rushed,” Fed governor Christopher Waller said Tuesday.
“When the time is right to begin lowering rates, I believe [the rate] can and should be lowered methodically and carefully,” Waller said in remarks to the Brookings Institution.
While in many past cycles, the Fed cut rates quickly and by large amounts, Waller said that this year he sees “no reason to move as quickly or cut as rapidly as in the past.”
Waller said that he thinks the Fed’s interest-rate policy is now “set properly.”
The healthy state of the economy provides the Fed with the flexibility to lower the policy rate when inflation comes down, he said, adding that otherwise, when adjusted for inflation, policy would be too tight.
The timing and number of rate cuts will be driven by incoming data, he said.
Markets have priced in seven rate cuts this year, beginning with the central bank’s March meeting.
Last week, Fed officials tried to push back on the expectations of quick and rapid cuts, but the market held its ground.
“To paraphrase a former head of the European Central Bank, the market heard the Fed’s comments last week but did not listen,” said Lou Crandall, chief economist at Wrightson ICAP.
Krishna Guha, vice chair of Evercore ISI, said Waller’s comments signal he does not expect to push for a March hike. Guha added that the comments fit with his expectation of a first cut in May or June.
In his speech, Waller said he was pleased with the economy’s recent performance. Slowing GDP growth to a range between 1% and 2% in the final three months of the year, with the unemployment rate below 4% and inflation running close to 2% over the last six months, “is almost as good as it gets,” he said.
“My outlook has made me more confident than I have been since 2021 that inflation is on a path to 2%,” he said.
There are questions about whether the current conditions will last, however.
“Concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed,” Waller said.
In mid-February, the government will issue annual revisions to consumer-inflation data. Last year, the annual update erased earlier data showing lower inflation, he noted.
“My hope is that the revisions confirm the progress we have seen, but good policy is based on data and not hope,” he said.
Stocks DJIA SPX were lower after Waller spoke, while the 10-year Treasury yield BX:TMUBMUSD10Y rose after the speech to 4.08%.
