Speech by Governor Waller on the economic outlook

Federal Reserve Governor Christopher J. Waller strongly advocates for a 25 basis point policy rate cut at the upcoming FOMC meeting, citing compelling evidence of a significant economic slowdown with H1 2025 GDP growth at 1% and a weakening labor market where private payrolls are near 'stall speed' after accounting for anticipated revisions. He argues that current policy is excessively restrictive, being 125-150 basis points above the estimated neutral rate, and that tariff-driven inflation is temporary and should be 'looked through' as underlying inflation remains near the 2% target. Waller stresses the increased downside risks to the employment mandate, urging proactive action to align policy with slowing economic momentum and avoid falling behind the curve, with potential for further cuts if underlying inflation remains contained.

Analysis

Federal Reserve Governor Christopher J. Waller has presented a robust and data-driven case for an imminent 25 basis point policy rate cut, signaling a significant dovish shift. He argues that the current policy stance, at 125-150 basis points above the estimated 3% neutral rate, is overly restrictive given the sharp economic deceleration. Waller points to real GDP growth slowing to approximately 1% in the first half of 2025, a steep decline from 2.8% in the latter half of 2024, with consumer spending growth similarly weakening. He dismisses recent inflation upticks, attributing them to temporary tariff effects that he believes should be "looked through," as underlying inflation remains close to the 2% target and inflation expectations are anchored. Critically, Waller highlights increasing fragility in the labor market that is not apparent in headline figures; he notes that private payroll growth is near "stall speed" after accounting for anticipated downward data revisions, a view supported by a reported decline in the ADP private-sector employment survey. This combination of slowing growth, a weakening labor market, and manageable underlying inflation underpins his argument that the risks to the employment mandate now outweigh inflation risks, necessitating pre-emptive action to avoid falling behind the curve.

Key Decisions for Investors

• Increase conviction in a near-term Fed pivot, as Waller's explicit call for a July cut makes the dovish case a primary scenario, suggesting investors should position for lower front-end rates.
• Re-evaluate exposure to cyclical sectors dependent on robust economic growth, as the speech details a significant slowdown in consumer spending and private-sector hiring, signaling potential earnings pressure for these industries.
• Monitor upcoming private payroll data and inflation reports with a focus on core metrics excluding tariff impacts, as these are the key variables Waller has identified to justify his case for further easing.
• Consider that the Fed's reaction function may be shifting towards a more pre-emptive, risk-management approach, implying a lower threshold for rate cuts if labor market data continues to soften.