MNI: Fed's Waller: Cut In Oct, Then Reconcile Growth-Jobs Gap

The Federal Reserve should cut interest rates by another quarter point at its meeting this month and then look to see how a seeming disconnect between strong growth and weak employment resolves itself, Fed Governor Christopher Waller said Thursday.

“I believe that the FOMC should reduce the policy rate another 25 basis points at our meeting that concludes October 29. But beyond that point, I will be looking for how the solid GDP data reconcile with the softening labor market,” Waller said. (See MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)

If economic growth remains as strong as it has been recently and the labor market picks up in tow, that would lessen the need for the Fed to proactively ease monetary policy, he said. 

“What I would want to avoid is rekindling inflationary pressure by moving too quickly and squandering the significant progress we have made taming inflation. On the other hand, if the labor market continues to soften or even weaken and inflation remains in check, then I believe the FOMC should proceed to reduce the policy rate toward a neutral level, which I judge is about 100 to 125 basis points lower than it is today,” Waller said in prepared remarks to the Council of Foreign Relations. 

“The labor market has been sending some clear warnings lately, and we should be ready to act if those warnings are validated by what we learn in the coming weeks and months.”

He is not especially concerned about inflation because he views inflation excluding a one-time hit from tariffs to be "running fairly close to our target.” 

In the absence of economic data during the government shutdown, Waller said he’s relying on business contacts to get a feel for conditions on the ground. “So far that input tends to support — rather than resolve — the contrast we have seen between strong economic activity and a softening labor market.”

He said what data is still available on the labor market largely corroborate his view that clouds are gathering around the employment outlook that policymakers must watch closely.