Federal Reserve Governor Waller: Further rate cuts may be possible, but the timing depends on inflation progress

According to the Zhitong Finance APP, Federal Reserve Governor Christopher Waller stated on Wednesday that the inflation rate is expected to continue to decline in 2025, allowing the Federal Reserve to further lower interest rates, although the pace of rate cuts remains uncertain.

Waller noted that while inflation seems to "stall" above the Federal Reserve's 2% target level in the last few months of 2024, market-based inflation estimates and short-term inflation readings lead him to believe that U.S. inflation will continue to ease, even if the pace of improvement is uncertain.

Speaking at an event organized by the Organization for Economic Cooperation and Development (OECD) in Paris, Waller said, "This slight progress has led to calls to slow down or halt the reduction of policy interest rates. However, I believe that the inflation rate will continue to move towards the 2% target in the medium term, and further rate cuts will be appropriate."

He stated, "The pace of rate cuts will depend on how much progress we make in controlling inflation while preventing a softening of the labor market."

The Federal Reserve has lowered the policy interest rate by a total of one percentage point in the last three meetings of 2024, but the market expects the rate to remain in the current range of 4.25% to 4.5% at the upcoming policy meeting scheduled for January 28 to 29.

Waller did not disclose how many times he believes rate cuts would be appropriate this year, but he pointed out that there is a "wide divergence of views among Federal Reserve officials, ranging from no rate cuts to as many as five rate cuts," with five cuts potentially lowering the Federal Reserve's policy rate by an additional 1.25 percentage points.

As inflation progress slows, Federal Reserve officials are reluctant to commit to further rate cuts, as the economy itself is performing well, with growth exceeding long-term potential expectations, and ongoing hiring and wage growth supporting consumer spending.

Waller stated, "I still believe that the fundamentals of the U.S. economy are solid, and there is no data or forecast indicating that the labor market will significantly weaken in the coming months."

The U.S. will release new employment data for December on Friday.

Federal Reserve policymakers are also trying to clarify how the incoming Trump administration's policies will change the economic trajectory, with the potential impact of tariffs being one of the primary concerns.

Waller noted that while raising tariffs "increases the likelihood of new upward pressure on inflation in the coming year," he stated that this may not lead to sustained price pressures, and therefore "is unlikely to affect my view on appropriate monetary policy."