Fed Gov. Waller sees three rate cuts this year, if inflation cooperates

The Federal Reserve should be able to “methodically and carefully” lower its interest rate target this year, if inflation continues to moderate, Federal Reserve Gov. Christopher Waller said Tuesday.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Waller said in a Brookings event. “In many previous cycles, which began after shocks to the economy either threatened or caused a recession, the FOMC cut rates reactively and did so quickly and often by large amounts. This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”

In December, the panel published its Summary of Economic Projections, which showed officials expect to cut rates 75 basis points this year, if trends continue.

“As long as inflation doesn’t stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year,” said Waller. 

Waller expects 1%-2% growth in gross domestic product in the fourth quarter, unemployment levels holding steady below 4%, and the closely watched core personal consumption expenditure inflation rate, which “has been running close to 2% for the last six months. For a macro economist, this is almost as good as it gets.”    

The threat of recession is also sliding as the yield curve shows inversion between yields on U.S. two-year and 10-year Treasury notes has been narrowing since mid-December.

Waller noted higher inflation was partly triggered by free-spending fiscal policy spurred by pandemic relief funds. “If you’re going to increase the spending and the debt by $6 trillion in a matter of two years and then say that has no effect on demand, that seems impossible to me. It isn’t the only thing that contributed to the inflation, but it’s certainly had an impact.”