Christopher Waller Supports 25 Bps September Cut After Dissenting For Same In July: Economist Asks Why Not 50 Bps This Time?
News Summary
Federal Reserve Governor Christopher Waller has signaled strong support for a 25 basis point interest rate cut at the central bank’s upcoming September meeting, reiterating a position he favored in July. Despite his own assessment of a deteriorating economy, his renewed call for a modest cut has prompted an economist to question why he isn't advocating for a more aggressive 50 basis point reduction. Speaking at the Economic Club of Miami, Waller stated he would support a 25 basis point cut in September, adding that a larger cut is not needed. Macro strategist Craig Shapiro questioned this logic on social media, asking why Waller wouldn't push for a 50 bps cut if labor data is worse now than in July. Waller argued that recent economic data, particularly dismal job creation figures, have strengthened his case for easing monetary policy and increased downside risks to the labor market. He anticipates "additional cuts over the next three to six months," with the pace driven by incoming data. Notably, Waller and Governor Michelle Bowman dissented in July, favoring an immediate 25 bps cut—the first time two permanent Fed Board members explicitly dissented since 1993. Markets are currently pricing an 85.2% likelihood of a September cut, with probabilities for October and December easing at 92.8% and 98.8% respectively.
Background
The Federal Reserve began raising interest rates in early 2022 to combat inflation, but as inflation showed sustained signs of slowing in early 2024, markets widely anticipated a pivot towards an easing cycle. However, internal divisions within the Fed have persisted regarding the timing and magnitude of rate cuts. Labor market data is a critical indicator for the Fed's assessment of economic health and the trajectory of monetary policy. Figures such as unemployment rates, wage growth, and job creation directly influence the Fed's outlook on inflation and recession risks. Since mid-2024, there have been indications of a potential weakening in the labor market, adding pressure on the Fed to consider rate cuts.
In-Depth AI Insights
Why would Christopher Waller advocate for only a 25 basis point cut amidst acknowledged economic deterioration, rather than a more aggressive 50 basis points? What strategic considerations are at play here? - Waller's stance likely reflects the Fed's delicate balancing act between responding to an economic slowdown and guarding against a potential resurgence of inflation. He may believe that while the labor market faces downside risks, inflation may not be fully subdued or could have underlying grounds to re-emerge, necessitating a gradual rather than aggressive easing strategy. - Sticking to 25 basis points preserves policy flexibility and ammunition for the Fed. Should economic conditions worsen further, there's still room for additional cuts; conversely, an aggressive cut could limit policy options if inflation unexpectedly picks up. - This "slow and steady" approach also avoids signaling panic to the markets, suggesting the economy is in such dire straits that an emergency, large cut is needed, thereby maintaining market confidence. How do Waller and Bowman's July dissent and Waller's current explicit statement reveal the evolving policy divisions within the Federal Reserve, and what impact might this have on Chair Jerome Powell's leadership? - An open dissent from two governors is rare, indicating significant differences within the Fed on current economic assessments and the optimal policy path, to the point where these differences are publicly expressed beyond regular discussion. - Waller and Bowman represent a faction within the Fed more inclined to pre-emptively cut rates to address downside economic risks. Such public divisions, especially against a backdrop of weakening labor market data, could put greater pressure on Chair Powell to balance committee consensus with responsiveness to economic indicators. - This internal friction might also dilute the Fed's unified voice in the market, complicating policy communication and potentially leading markets to pay closer attention to future voting records and individual committee members' remarks. Given President Donald Trump's incumbent status, how might the Fed's policy independence be affected by these internal cracks and external political pressures? - The Trump administration has consistently advocated for lower interest rates to stimulate the economy. Therefore, internal calls for rate cuts within the Fed, particularly from a relatively hawkish official like Waller shifting position, might be perceived as a reflection of political pressure, even if the underlying motivation is purely economic. - Internal divisions could provide an "entry point" for external political intervention, allowing the administration to leverage existing calls for cuts within the Fed to exert further pressure. This could lead to increased market skepticism regarding the Fed's independence, especially in a re-election context. - If the Fed fails to act swiftly under economic downturn pressures, it could face greater public criticism from the White House, potentially impacting its reputation and long-term effectiveness.