Fed Governor Waller: Inflation slowdown faster than expected, prompting him to join the 50 basis points rate cut camp

On Friday, highly influential Federal Reserve Board member Bullard stated that he feels that the correct action to maintain the strength of the U.S. economy is for the Federal Reserve to cut interest rates by 50 basis points at the September meeting.

Bullard pointed out that inflation data, rather than concerns about the labor market, is the reason he supports lowering interest rates by 50 basis points this week. "What worries me more is that inflation is lower than I expected. The pace of inflation slowing down is faster than I anticipated. Many data indicate that core PCE is below the Fed's inflation target. Compared to our expectations, inflation may be on a lower path."

Previously, Bullard voted in favor of a 50 basis point rate cut at the September FOMC policy meeting. Another Fed Board member Bowman voted against this decision, believing that a 25 basis point rate cut should be made, marking the first time a Board member has dissented since 2005.

Bullard's statement this time is largely consistent with the statement released by the Federal Reserve on Wednesday. The Fed stated in the release that they now believe the risks to U.S. inflation and the labor market are "roughly balanced."

The Federal Reserve announced a significant 50 basis point rate cut this week, initiating a new round of monetary policy easing. Although the market had high expectations for this, the 50 basis point rate cut still surprised many economists. According to the latest dot plot, Fed officials expect a total of 50 basis points of rate cuts in the remaining two FOMC meetings this year.

Inflation data provides room for rate cuts

Bullard cited recent CPI and PPI data, which show that the Fed's preferred inflation measure - core inflation excluding food and energy - has been below 1.8% in the past four months, while the Fed's target is a 2% annual inflation rate.

Bullard said, "This has surprised me a bit, the speed of the decline in inflation is much faster than I expected, which makes me have to say, look, I think a 50 basis point rate cut is the right thing to do."

Bullard stated that recent data shows a stronger downward trend in inflation, providing further room for easing when the Fed shifts its focus to supporting the weak labor market. "The key is that we do have room to act, which is the signal sent by the FOMC committee."

Both the Consumer Price Index and the Producer Price Index rose by 0.2% month-on-month. On a 12-month basis, the CPI growth rate is 2.5%.

The Fed will review inflation data again next week when the U.S. Department of Commerce releases the August Personal Consumption Expenditures (PCE) Price Index report, which is the Fed's preferred inflation measure. Fed Chair Powell stated on Wednesday that Fed economists expect this index to show an annual inflation rate of 2.2%, compared to 3.3% a year ago.

Several scenarios

Bullard also stated that there may be multiple scenarios for future interest rate movements, each depending on the performance of economic data:

• If the data is positive, no problem, then it is appropriate to cut rates by 25 basis points at the next one or two meetings.
• When the inflation rate is significantly higher than expected, I strongly advocate for a substantial rate hike. To maintain the credibility of our 2% inflation target, I would also hold the same view when it goes down. If the data starts to weaken and continues to weaken, I would be more willing to actively cut rates to bring inflation closer to our target If the job market deteriorates, we may consider cutting interest rates by another 50 basis points.
• If, as we have seen before, inflation data suddenly reverses, we may support pausing the rate cuts.

Market Reaction

After Powell's statement, the intraday decline in US stocks narrowed, and the intraday decline in long-term US bonds also narrowed.