Speech by Governor Waller on the economic outlook

FOMC Governor Christopher J. Waller advocates for a 25 basis point interest rate cut at the upcoming October 29 meeting, citing a softening labor market and underlying inflation that is close to the 2% target, despite surprisingly strong economic growth data. Waller highlights a critical conflict between robust GDP figures and weakening employment trends, a situation complicated by delayed government data due to a shutdown. He indicates that while a near-term cut is warranted, the future pace of monetary policy easing will depend on how this data conflict resolves, with potential for slower cuts if growth holds and the labor market recovers, or further reductions towards a neutral rate (100-125 bps lower) if labor market weakness persists and inflation remains contained.

Analysis

FOMC Governor Christopher J. Waller advocates for a 25 basis point interest rate cut at the upcoming October 29 meeting, citing a softening labor market despite surprisingly strong economic growth. He highlights a critical conflict between robust Q3 GDP growth projections (Atlanta Fed GDPNow ~4%, Blue Chip 2.5%) and weakening employment trends, with monthly job creation falling significantly (Q1: 111k, Q2: 55k, August: 22k; September ADP: -32k).

Inflation, while above target (August PCE 2.7%, core PCE 2.9%), is viewed as manageable, with underlying inflation (excluding tariff effects) estimated near the 2% target and expectations well-anchored. The government shutdown has delayed crucial September economic data, including employment and retail sales, which complicates the assessment of current economic conditions and the resolution of the growth-labor market divergence.

Beyond the initial cut, Waller indicates that the future pace of monetary policy easing will depend on how this data conflict resolves. Slower cuts are anticipated if economic growth holds and the labor market recovers, while further reductions towards a neutral rate (100-125 bps lower) are likely if labor market weakness persists and inflation remains contained. Artificial intelligence is noted as a short-term risk to labor demand, exemplified by Walmart's plans for steady net employment despite sales growth due to AI-driven efficiency.

Key Decisions for Investors

• Anticipate a 25 basis point interest rate cut by the FOMC on October 29, aligning with Governor Waller's dovish outlook.
• Closely monitor the resolution of the conflicting economic data, particularly delayed September employment and retail sales reports, as this will be key to determining the future trajectory of monetary policy easing.
• Assess the potential impact of a softening labor market on consumer-facing sectors, especially given reported caution from lower-income households, and consider the long-term implications of AI-driven labor displacement on specific industries and company valuations.