Federal Reserve Governor Christopher Waller: Does not rule out a rate cut in March; if data aligns, there may be 3-4 rate cuts this year

On Thursday, Federal Reserve Governor Christopher Waller stated that the U.S. CPI data released on January 15 was very good, and if we continue to receive more data like this, we may see the Federal Open Market Committee (FOMC) cut interest rates in the first half of 2025, and even the possibility of a rate cut in March cannot be ruled out.

Data released by the U.S. yesterday showed that the December CPI rose 2.9% year-on-year, which, although the highest since July last year, met expectations. More importantly, both the core CPI year-on-year and month-on-month were below expectations, and the increases were lower than in November.

After the release of the U.S. CPI data, market expectations for interest rate cuts heated up. The first comprehensive rate cut this year is expected to occur at the Federal Reserve meeting in July, and for the entire year of 2025, the expected rate cut magnitude has risen from 34 basis points to 40 basis points. In the eyes of investors, the decision at the May meeting now feels like a coin toss.

Waller stated that if future inflation data aligns with the positive December CPI report, the number of rate cuts by the Federal Reserve this year may exceed market expectations and occur earlier than anticipated. He expects the first rate cut this year could happen in the first half, as long as economic data such as inflation and unemployment rate cooperate, with more rate cuts to follow later this year.

Waller pointed out that the median estimate of the so-called neutral policy rate (which neither encourages nor suppresses economic growth) by Federal Reserve officials suggests that three to four rate cuts this year are possible, depending on the data to be released:

It depends on the data. If we make significant progress, we could cut rates more times this year. The number of cuts could be three or four, assuming each cut is a quarter of a percentage point.

If the data does not cooperate and we encounter very sticky inflation, then we would revert to two cuts, or even one.

Regarding the FOMC policy meeting in January, Waller said, “Well, in January, we need to see what happens. We are really not in a hurry to take action.”

Waller described the U.S. labor market as solid but not booming, reflecting that the Federal Reserve's policy stance has had a suppressive effect on the economy. “When you look at data such as hiring rates, voluntary turnover rates, and wage growth, you do not see the labor market starting to overheat or accelerate, which is why I believe the labor market remains constrained.”

Waller expressed optimism that the trend of cooling inflation will continue, and the inflation stickiness seen in 2024 will dissipate, with U.S. inflation returning to the Federal Reserve's target level of 2% faster than others expect. “Therefore, I may be more optimistic about cooling inflation than my colleagues, which drives my view on the policy path.”

After Waller discussed the recent prospects for FOMC rate cuts, traders' expectations for Federal Reserve rate cuts increased, U.S. Treasury yields quickly fell, and U.S. stocks saw slight gains:

• The market-implied probability of a rate cut in May rose to about 50%, but June seems more likely. The market now estimates the probability of a second rate cut before the end of this year has risen to about 55%, about 10 percentage points higher than before Waller's remarks.
• The yield on the U.S. 10-year Treasury bond turned negative again during the day, having previously reached a daily high of 4.6879% shortly before the release of U.S. retail sales data at 21:08 Beijing time. The two-year U.S. Treasury yield, which is sensitive to policy, sharply dropped from 4.3%, refreshing its daily low to nearly 4.25%, with an overall decline of more than 1 basis point during the day, and also refreshed its daily high to 4.3101% at 21:24
• The S&P 500 index rebounded to near the flat line, the Dow Jones fell less than 90 points, down 0.2%, and the Nasdaq's decline narrowed to 0.16%.

Waller's latest remarks are much more dovish compared to other heavyweight officials of the Federal Reserve. For example, the "number three" of the Federal Reserve, New York Fed President Williams, stated after the CPI data was released that the economic outlook for the United States remains very uncertain, especially regarding the fiscal, trade, immigration, and regulatory policies of the Trump administration. Therefore, future actions of the Federal Reserve will depend on economic data.

Senior journalist Nick Timiraos, known as the "new Federal Reserve correspondent," stated yesterday that the latest U.S. CPI report had almost no impact on the Federal Reserve's prospects for pausing interest rate cuts. The mixed data cannot indicate the direction of inflation, and it is expected that the Federal Reserve will remain on hold this month, needing more data to determine the next steps.

According to the median forecast from the dot plot released last month, Federal Reserve officials expect to cut interest rates twice this year.

Reports last week indicated that Trump's advisors are considering how to reshape the leadership of the Federal Reserve. Trump's advisors have begun drafting a list of potential successors to replace Federal Reserve Chairman Powell in May 2026, and they will primarily focus on the current Federal Reserve officials' comments on interest rates to adjust the list of candidates.

At that time, informed sources stated that current Federal Reserve Governor Waller, who was appointed during Trump's first presidential term, was seen as a potential candidate for Federal Reserve Chairman. However, after he supported a 50 basis point rate cut in September, he may no longer be seriously considered by Trump's team, as Trump stated that unexpectedly cutting rates significantly just weeks before the presidential election "is a political move aimed at keeping someone in office."