Federal Reserve Governor Christopher Waller acknowledged the likelihood of interest rate cuts in 2024
Washington, D.C. 16th January 2024 – In a speech delivered on Tuesday, Federal Reserve Governor Christopher Waller acknowledged the likelihood of interest rate cuts in 2024 but emphasized the importance of a measured and careful approach. Waller’s comments provided a nuanced perspective that countered market expectations for aggressive easing this year.
Waller expressed confidence in the Federal Open Market Committee’s (FOMC) ability to lower the target range for the federal funds rate, provided inflation remains in check. He noted that the central bank should not rush into rate cuts, differentiating this cycle from previous ones where reactive and rapid rate reductions were common.
Market indicators on Tuesday morning suggested a 71% chance of the FOMC initiating rate cuts in March, according to the CME Group’s FedWatch measure. Traders have increased expectations for 2024, with an additional cut being factored in this week, projecting a total of seven quarter-percentage point rate decreases by the year’s end.
In addition to potential rate cuts, Waller hinted at the Fed’s intention to slow down the pace of “quantitative tightening” in 2024. This process involves reducing the central bank’s balance sheet by allowing maturing bond proceeds to roll off without reinvesting them. The Fed has been permitting up to $95 billion a month to roll off, resulting in a reduction of its holdings by approximately $1.2 trillion.
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Waller proposed a gradual tapering strategy, with a focus on Treasurys rather than mortgage-backed securities holdings. He indicated that a reduction in the latter would proceed at the current pace.
Waller’s optimism about the economic data was evident as he described the macroeconomic conditions as “almost as good as it gets.” He highlighted the progress made against inflation without adversely affecting the labor market. As a permanent FOMC voter, Waller underscored that this economic environment has allowed the Fed to consider the risks of over-tightening.
Following the release of Waller’s remarks, stocks experienced a sharp decline, while Treasury yields moved higher.
Despite 12-month inflation running well above the Fed’s 2% goal, Waller pointed to measures over shorter time frames, such as the six-month core personal consumption expenditures price index, which showed annual inflation at 3.2% and the six-month measure at around 1.9%.
Unemployment has remained below 4%, and the gross domestic product has defied expectations of a recession, growing at a rate that Wall Street did not anticipate.
Waller concluded his speech by stating that the setting of monetary policy should proceed with caution to avoid over-tightening. While he believes the Fed is “within striking distance” of achieving its 2% inflation goal, he emphasized the need for more information, particularly upcoming revisions to the Labor Department’s consumer price index inflation measure, before declaring victory.