Fed's Waller Backs Rate Cut In December Amid Weakening Labor Market: 'Not Worried About Inflation Accelerating'
News Summary
Federal Reserve Governor Christopher Waller on Monday advocated for a 25-basis-point interest rate cut in December, citing a deteriorating labor market as his primary concern. He stated he is "not worried about inflation accelerating or inflation expectations rising significantly," despite a government shutdown delaying official economic reports. Waller indicated that private-sector data, including payroll firm ADP reports and surveys, paints a clear picture of a labor market "still weak and near stall speed," attributing this slowdown to falling demand rather than a lack of supply. Waller observed that while the stock market is booming due to AI-related businesses, these account for less than 3% of employment, offering limited support to most Americans. He also noted that underlying inflation, after accounting for tariff effects, is "relatively close" to the 2% target, with medium- and longer-term inflation expectations remaining well anchored. He concluded that a December cut is a matter of "risk management" to provide insurance against an acceleration in labor market weakening and to move policy towards a more neutral setting. The CME Group's FedWatch tool currently shows markets pricing a 46.6% likelihood of a December rate cut.
Background
It is currently 2025, and President Trump has been re-elected, with the U.S. economy facing a complex landscape. Despite a buoyant stock market driven by the AI boom, labor market data indicates weakness, and middle- to lower-income consumers are grappling with record-low housing affordability and high auto purchasing costs. The Federal Reserve has experienced above-target inflation for the past five years, yet inflation expectations remain well-anchored, offering policymakers some flexibility. The Fed's dual mandate is to achieve maximum employment and price stability. Recent government shutdowns have delayed the release of key economic reports, increasing uncertainty for Fed decisions and prompting greater reliance on private-sector data. Following the 2024 presidential election, markets remain highly attentive to the Fed's policy trajectory, with any signals regarding interest rate adjustments poised to significantly impact market sentiment.
In-Depth AI Insights
Why is Waller pushing for a rate cut when labor market data appears contentious? - Waller's stance likely reflects deeper concerns within the Fed about downside economic risks, especially with the Trump administration pushing for economic growth. His emphasis on private data over official reports suggests either a distrust of the lag/coverage of existing official statistics or a belief that private data offers a more real-time economic snapshot to avoid policy delays. - His "risk management" argument, in the context of stable inflation expectations, might be a rationale for preemptive cuts to avert a deeper labor market recession, thereby politically aligning with the Trump administration's employment agenda. This could be an attempt to create fiscal space for potential future economic stimulus measures. What profound impacts will this Fed move have on the U.S. economy and markets in late 2025 and 2026? - Job Market & Consumer Confidence: A rate cut might stabilize employment expectations in the short term, but its stimulating effect will be limited if fundamental labor market weaknesses persist. Structural pressures on middle- and lower-income consumers due to high living costs are not solely solvable by rate cuts and could instead fuel asset bubbles, exacerbating wealth inequality. - Inflation & Asset Prices: Waller's optimistic view on inflation might underestimate long-term risks. If cuts are too early, inflation could resurface if global supply chains or geopolitical factors push commodity prices up again. Accommodative monetary policy could further inflate equity markets (especially AI-related sectors), increasing valuation risks, while the transmission to real economic recovery might be uneven. - Dollar Trajectory & Capital Flows: A Fed rate cut could weaken the dollar, favoring U.S. exports in the short term but potentially impacting international capital inflows in the long run. Amid a global economic slowdown, if other major central banks do not follow suit, new currency volatility could emerge. What deeper considerations lie behind Waller's comment on AI's insufficient job creation? - This indicates the Fed's vigilance regarding the current "K-shaped recovery" where the stock market is driven by a few tech giants. The AI boom has not broadly translated into job growth, signaling issues with the quality and inclusivity of economic expansion. - Waller's remarks might also be a subtle message to the market: that the current surge in asset prices is disconnected from the real economy and the well-being of most Americans. This sets the stage for potential future measures (such as regulatory or fiscal policy adjustments) to address this imbalance, especially under a Trump administration focused on "America First" and employment.