Fed's Waller still open to cutting interest rates later this year

Fed Governor Christopher Waller indicated openness to potential interest rate cuts later in 2024, contingent on inflation continuing to move towards the 2% target and a solid labor market, even amidst potential inflationary pressures from tariffs. Waller believes any tariff-related inflation would likely be temporary and supports looking past near-term effects when setting policy rates. He acknowledged downside risks to economic activity and upside risks to inflation in the second half of 2025 due to trade policy, while also noting concerns about rising bond yields driven by increased government borrowing and a less welcoming attitude towards foreign investment in U.S. assets.

Analysis

Federal Reserve Governor Christopher Waller signaled a continued openness to interest rate reductions later in 2024, a stance that contrasts with some other central bankers advocating a more cautious "wait-and-see" approach. Waller's potential support for cuts is contingent upon inflation demonstrating sustained progress towards the Fed's 2% target and the maintenance of a "solid" job sector. Crucially, he stated he would "support looking through any tariff effects on near-term inflation when setting the policy rate," viewing price pressures from potential import taxes as unlikely to be persistent, especially if tariffs settle at the lower end of possibilities. Waller acknowledged that while the economy has seen minimal tariff impact thus far, there are "downside risks to economic activity and employment and upside risks to inflation in the second half of 2025," heavily dependent on how trade policy evolves. He differentiated current inflation dynamics from the persistent pressures experienced in 2021, noting that the underlying drivers of that period's persistence are not currently in place, and emphasized his greater reliance on market-based views and professional forecasters who anticipate contained price pressures. Furthermore, Waller attributed the recent rise in bond yields to concerns over increasing government borrowing and a perceived less welcoming U.S. stance towards foreign investment, contributing to a "risk-off attitude from foreign buyers of U.S. assets."

Key Decisions for Investors

• Investors should closely monitor incoming inflation data and labor market reports, as these are explicitly stated by Waller as prerequisites for considering 'good news' rate cuts later this year.
• Assess the potential for the Federal Reserve to adopt Waller's stance of 'looking through' temporary tariff-induced inflation, which could alter the market's reaction to near-term price increases.
• Factor in the heightened uncertainty surrounding trade policy and its potential to negatively impact economic activity and employment while creating upside inflation risks, particularly for the second half of 2025.
• Consider Waller's commentary on rising bond yields, specifically concerns about government borrowing and shifts in foreign investor sentiment towards U.S. assets, when evaluating fixed income strategies and sovereign risk.