Federal Reserve Governor Waller: Given the current economic outlook, there is no need to rush to cut interest rates

On the 17th, Federal Reserve Governor Waller stated on CNBC that given the weakening labor market, there is still room for the Federal Reserve to cut interest rates, and it can adopt a "steady and gradual" approach to bring the policy rate down to neutral levels.

He emphasized that based on the current economic outlook, "there is no need to rush to cut interest rates," and the Federal Reserve can proceed at a moderate pace without taking drastic actions.

Waller pointed out that the current interest rate level is 50 to 100 basis points above the neutral rate. Regarding the inflation outlook, he believes that inflation has been brought under control and will not accelerate again, expecting it to continue to decline in the coming months. At the same time, he mentioned that although the labor market shows "very weak" performance and growth is close to zero, there has not been a "cliff-like decline."

Waller is currently one of the five final candidates to succeed the current Federal Reserve Chairman Jerome Powell. Powell's term is set to end in May next year, and Waller has confirmed that he is scheduled to be interviewed by Trump this week. His statements convey a clear policy signal to the market: the Federal Reserve will seek a balance between controlling inflation and supporting employment, responding to economic slowdown with a moderate pace of interest rate cuts rather than panic stimulus measures.

A Steady Path Toward Neutral Interest Rates

Waller explicitly ruled out the necessity of rushing into significant interest rate cuts, advocating for a gradual adjustment of policy. He believes that the current economic outlook allows the Federal Reserve to adopt a more measured strategy, gradually guiding interest rates from the current restrictive levels to neutral levels.

He specifically quantified the current policy space, noting that the current interest rate level is still 50 to 100 basis points above the neutral rate. This gap indicates that even in the absence of an economic crisis, the Federal Reserve still has ample room for adjustment. Waller emphasized that the Federal Reserve's actions do not need to be drastic; a moderate pace is sufficient to address the current economic situation.

Weakness and Support in the Labor Market

Regarding the closely watched labor market, Waller provided a mixed assessment. He admitted that the labor market is currently "very weak," with poor employment growth, even close to zero. However, he also emphasized that there has not been a sudden cliff-like drop in the market, indicating that the economy is not in an uncontrollable recession.

Waller pointed out that the Federal Reserve's previous interest rate cuts have already provided some assistance to the labor market. Signals from the labor market suggest that the Federal Reserve should continue to cut rates. Looking ahead, he hopes that the economic situation in 2026 will improve, further boosting the labor market. As for the long-term impact of artificial intelligence on employment, he stated that it is still unclear.

Controllable and Declining Inflation Expectations

In terms of price stability, Waller expressed strong confidence. He asserted that inflation will not accelerate again and believes that inflation has been brought under control, with the Federal Reserve continuing to maintain this control. Although the current inflation rate is still above the target level, he expects the data to further decline in the coming months.

The key lies in the stability of inflation expectations. Waller emphasized that stable inflation expectations provide a foundation for policy adjustments. He clearly stated that the mere factor of declining inflation expectations is sufficient to support the Federal Reserve in cutting rates, indicating that the threshold for rate cuts does not entirely depend on the deterioration of the real economy

Balance Sheet and External Risks

In addition to interest rate policy, Waller also explained the Federal Reserve's balance sheet management. He clarified that the new round of asset purchases by the Federal Reserve does not constitute a stimulus measure, and the market's reaction has been minimal. Currently, bank reserves are close to adequate levels, and regulatory easing will help further reduce the size of the Federal Reserve's balance sheet.

Regarding external risks, Waller believes that the downward risk posed by tariffs is limited, and it is difficult to assert that tariffs are the cause of a weak labor market. He sees no issue with the interaction between the Federal Reserve and the government