Interest Rate Cuts on the Horizon?
Federal Reserve Governor Christopher Waller has hinted at the possibility of multiple interest rate cuts this year, provided inflation continues to ease. In a recent interview, Waller expressed optimism that the central bank could lower interest rates as early as the first half of the year, with subsequent cuts following if economic data cooperates.
A Data-Driven Approach
Waller emphasized that the number of rate cuts would be determined by the data, suggesting that if progress is made on inflation, three or four quarter-percentage-point increments could be possible. However, if inflation remains sticky, the number of cuts might be limited to one or two.
Market Reaction
Traders have taken note of Waller’s remarks, increasing their bets on a slightly more aggressive pace of rate cuts. The market-implied odds of a May move have risen to around 50%, with June appearing to be a more likely candidate. Expectations for a second reduction by the end of the year have also increased, now standing at around 55%.
Inflation Expectations
At the heart of Waller’s hopes for easing is a belief that inflation will continue to decline as the year progresses. Despite recent data showing stickiness in certain prices, Waller remains optimistic that the consumer price index will move closer to the Fed’s 2% target.
Fed’s Cautious Approach
While Waller’s comments suggest a more aggressive approach to rate cuts, the Federal Open Market Committee has taken a more cautious stance. At their December meeting, members penciled in two cuts for 2025, but subsequent commentary has indicated a patient approach. The FOMC’s next meeting is scheduled for January 28-29, with markets pricing in almost no chance of a move.
Waller’s Outlook
Waller’s outlook for the path of policy is driven by his expectation that inflation will ease further. He believes that the stickiness seen in 2024 will dissipate, allowing the Fed to take a more accommodative stance. However, he also emphasized the need to wait and see how the data unfolds, stating that the Fed is in no rush to make a move.
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