Important new words arrive in support of a rate cut by the US Federal Reserve at its meeting this month. Christopher Wallermember of the Board of Governors of the United States Federal Reserve, has in fact declared that expect an interest rate cut in Decemberbut is concerned about recent inflation trends that could change his mind.
The words of the banker
“Having reduced the policy rate by 75 basis points since our September meeting, I believe that monetary policy is still restrictive and is putting downward pressure on inflation without creating unwanted weakness in the labor market. I expect rate cuts to continue into next year until we get closer to a more neutral policy rate setting,” he said at an American Institute for Economic Research Monetary event in Washington DC.
Waller acknowledged that recent data has raised the possibility that progress on inflation could stall at a level significantly above 2 percent, and that risk has raised concerns that the FOMC should consider keeping rates unchanged at its next meeting. “Based on the economic data in hand today and forecasts showing that inflation will continue its downward path to 2 percent over the medium term, I currently lean towards supporting a key rate cut at our December meeting – said Waller – But this decision will depend on whether the data we receive before then surprises us on the upside and changes my forecasts on the path of inflation”.
Progress on inflation
While Waller says he’s pleased with how the job market has held up under tight monetary policy, he says he’s less pleased with what data over the past two months has said about inflation. “After making a lot of progress over the last year and a half, i Recent data indicates that progress may be stalling“, underlined the central banker.
“If we compare the components of core inflation this October with those of last October, we see that 12-month housing services inflation has eased and goods inflation has moved to mild deflation, but there is was an increase in basic non-market services excluding housing – he explained – Overall, I feel like an MMA fighter that keeps having inflation in a chokehold, waiting for it to play out, but keeps getting out of hand at the last minute. But let me assure you that submission is inevitable: inflation is not leaving the octagon.”
While the recent increase and level of inflation raise concerns that it could remain above the FOMC’s 2 percent target, “this is a risk but not a certainty“Waller said. He points out that there was a similar rise in inflation a year ago, followed by a continued decline.
The implications for monetary policy
While some short-term aspects of the outlook may be a little unclear, “something that is clear is the direction of monetary policy and our policy rate over the medium term, which is declining,” he said in his speech. “This trajectory descendant reflects the fact that the level of aggregate demand in the economy, relative to supply, has moderated significantly in the last year: it is clearly visible in the spending and labor market data. Inflation is also significantly lower in that period, so it makes sense to move policy rates towards a more neutral setting.”
“AND there is still a long way to go – Waller pointed out – In September, the median of FOMC participants’ projections was that the federal funds rate would be 3.4 percent at the end of next year, or about 100 basis points lower than today. That number can and will likely change over time, but whatever the destination, there will be various ways to get there, with the speed and timing of cuts determined by the economic conditions we encounter along the way.”
“The rationale for continuing to cut the policy rate at the next FOMC meeting begins with how restrictive the current setting is,” he argued. “After cutting 75 basis points, I think the evidence is strong that policy continues to be significantly restrictive and that another cut will just mean we’re not hitting the brake pedal as hard”
Incoming data
In deciding what approach to take at the next FOMC meeting, Waller will carefully watch data coming in this week, from the Labor Department’s Job Openings and Labor Turnover Survey to Friday’s jobs reportbut also the consumer and producer price indices for November coming next week, which will allow a good estimate of PCE inflation for the month.
“All this information will help me decide whether to cut or skip – he said – From today, I am inclined to continue the work we have started to bring monetary policy back to a more neutral approach. Policy is still tight enough that we will not dramatically change the monetary policy stance with a further cut at our next meeting and allow plenty of room to slow the pace of rate cuts thereafter if necessary to maintain progress towards our rate target. inflation. That said, if the data we receive between now and the next meeting surprises in a way that suggests our predictions of slowing inflation and a moderating but still robust economy are wrong, then I will support holding the policy rate constant”.
