MNI: Fed's Waller Argues For July Cut; Supports More This Year

Federal Reserve Governor Chris Waller said Thursday he supports cutting U.S. interest rates by 25 basis points at the FOMC meeting later this month, adding that if underlying inflation remains in check and the economy continues to grow slowly then he'd support more 25 basis point cuts later this year. 

"My purpose this evening is to explain why I believe that the Federal Open Market Committee (FOMC) should reduce our policy rate by 25 basis points at our next meeting," he said according to prepared remarks. "The risks to the economy are weighted toward cutting sooner rather than later. If the slowing of economic and employment growth were to accelerate and warrant moving toward a more neutral setting more quickly, then waiting until September or even later in the year would risk us falling behind the curve of appropriate policy." 

If headline inflation data report modest, temporary increases from tariffs that are not unanchoring inflation expectations and the economy continues to grow slowly, then the Fed governor said he would support "further 25 basis point cuts to move monetary policy toward neutral" later this year.

ONE-OFF PRICE INCREASES

Tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge, he said. (See: MNI INTERVIEW: Fed's Daly: Time To Think About Adjusting Rates)

While there are further tariff-induced increases to inflation to come later this year, the multiple postponements are giving U.S. importers time to substitute finished or intermediate goods to domestic suppliers or foreign sources subject to lower tariffs and slowing demand means producers and importers may be finding ways to hold the line on prices.

"Second, a host of data argues that monetary policy should be close to neutral, not restrictive," he said, adding that he doesn't expect a GDP rebound in the second half of the year. 

"Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3%, and not where we are - 1.25 to 1.50 percentage points above 3%," said the Fed governor, who is seen as a possible contender to replace Jerome Powell as Fed Chair next year. "While I sometimes hear the view that policy is only modestly restrictive, this is not my definition of 'modestly.'"

LABOR ON EDGE

Waller also expressed worries about the labor market. "My final reason to favor a cut now is that while the labor market looks fine on the surface, once we account for expected data revisions, private-sector payroll growth is near stall speed, and other data suggest that the downside risks to the labor market have increased," he said.

The headline numbers from the June jobs report looked reassuring, with the unemployment rate at 4.1% and payroll gains of 147,000 in June, he said. "But looking a little deeper, I see reasons to be concerned. Half of the payroll gain came from state and local government, a sector of employment that is notoriously difficult to seasonally adjust this time of year" and "the unemployment rate for new grads is at a 10-year high." 

"Looking across the soft and hard data, I get a picture of a labor market on the edge," Waller said. 

"With inflation near target and the upside risks to inflation limited, we should not wait until the labor market deteriorates before we cut the policy rate." (See: MNI INTERVIEW: Bostic Backs Go-Slow On Rates As Tariffs Linger)