Fed’s Waller Hints at Rate Cuts in 2024 Amid Cooling Inflation; Others Prefer to Wait

Investors preparing for loosening of monetary conditions next year.
Fed’s Waller Hints at Rate Cuts in 2024 Amid Cooling Inflation; Others Prefer to Wait
Christopher Waller testifies before the Senate Banking, Housing, and Urban Affairs Committee during a hearing on his nomination to be member-designate on the Federal Reserve Board of Governors, in Washington, on Feb. 13, 2020. (Sarah Silbiger/Getty Images)
Andrew Moran

The Federal Reserve might begin cutting interest rates next year if inflation continues to cool, according to one member of the U.S. central bank’s Board of Governors.

Fed Gov. Christopher Waller suggested during remarks at the American Enterprise Institute (AEI) on Nov. 28 that monetary authorities could lower the benchmark fed funds rate if inflation continues to decline steadily toward policymakers’ 2 percent target in a sustainable manner.

“It has nothing to do with trying to save the economy,” Mr. Waller said. “It is consistent with every policy rule. There is no reason to say we will keep it really high.”

At the same time, he offered a mixed assessment of current conditions.

On the one hand, the Fed governor asserted that inflation rates are trending the way he anticipated and that he’s confident the central bank’s rate increases since March 2022 have helped slow the economy and will get inflation back to the target rate.

In October, retail sales tumbled 0.1 percent, durable goods orders tumbled 5.4 percent, and the economy added a smaller-than-expected 150,000 jobs.

However, Mr. Waller also stated that “inflation is still too high” and that it’s premature to determine if the slowdown in price pressures “will be sustained.” He says he plans to pay close attention to the consumer price index (CPI) and several other data points in coming weeks, including the personal consumption expenditures figure, to determine the trends.

Last month, the annual inflation rate slowed to a better-than-expected 3.2 percent. The core CPI, which excludes the volatile energy and food components, eased to 4 percent.

Looking ahead, according to the Cleveland Fed’s Inflation Nowcasting model, the annual inflation rate is expected to ease to 3 percent. Additionally, the consensus estimates for the Fed’s preferred PCE Price Index and core PCE are 3 percent and 3.5 percent, respectively.
“I am encouraged by what we have learned in the past few weeks—something appears to be giving, and it’s the pace of the economy,” he said.

Interest Rates

According to minutes from the November Federal Open Market Committee (FOMC) policy meeting, most participants continued to expect a reacceleration in inflation, citing potential “upside risks.” Officials also indicated that more rate boosts would be appropriate “if incoming data indicated that progress toward the Fed’s inflation objective was insufficient.”

The FOMC voted to leave interest rates unchanged at a range of 5.25 percent to 5.5 percent.

Financial markets think the central bank is finished raising rates, with the futures arena penciling in a pause at next month’s meeting. Investors are starting to brace for rate cuts as early as June 2024.

Fed Gov. Michelle Bowman contended that there were too many uncertainties regarding inflation and the broader economy, proposing more rate increases.

“We should keep in mind the historical lessons and risks associated with prematurely declaring victory in the fight against inflation, including the risk that inflation may settle at a level above our 2 percent target,” Ms. Bowman told the Utah Bankers Association in a speech on Nov. 28.
Federal Reserve Gov. Michelle Bowman gives her first public remarks as a Fed policymaker at an American Bankers Association conference in San Diego on Feb. 11, 2019. (Ann Saphir/Reuters)
Federal Reserve Gov. Michelle Bowman gives her first public remarks as a Fed policymaker at an American Bankers Association conference in San Diego on Feb. 11, 2019. (Ann Saphir/Reuters)

Richmond Fed President Tom Barkin presented the case for rates being higher for longer, telling Fox Business earlier this month that he expects inflation to be “stubborn” heading into the new year.

San Francisco Fed President Mary Daly told a banking conference in Germany that officials need “the boldness to wait” before adjusting the institution’s interest-rate policy amid all of the uncertainty in the U.S. economy and geopolitical realm.

Some financial experts agree. A recent Bloomberg survey of economists showed that many respondents think the Fed will keep rates higher until the end of 2025, though there might be some loosening beginning in the second quarter of 2024.
“The recent slowing in inflation, employment growth, and consumer spending supports our call that the Fed is done raising rates for this cycle,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co. “However, given that inflation remains still high and will decline just gradually, the Fed will wait to cut rates until mid-2024 and the easing of policy will be gradual.”

Americans Want Relief

Whether higher prices or rising borrowing costs, polling data show that the American people are pessimistic about the current economic landscape.
The University of Michigan’s Consumer Sentiment Index continued to weaken in November as “consumers appear worried that the softening of inflation could reverse in the months and years ahead.” The monthly report showed that one-year-ahead inflation expectations rose to 4.5 percent, up from a revised 4.4 percent.
Last month, an Associated Press-NORC Center for Public Affairs Research survey found that most Americans report their household expenses have risen over the previous year, and just one-quarter say their income has climbed in the same span.

In addition, 54 percent of Americans described their household’s financial situation as good, down from 63 percent in March 2022.

Despite the White House touting “Bidenomics,” a new McLaughlin & Associates national survey found that 50 percent of likely voters think President Joe Biden’s economic doctrine has been “bad or very bad for the economy, inflation, and the cost of living.”
Andrew Moran has been writing about business, economics, and finance for more than a decade. He is the author of "The War on Cash."