Christopher Waller, known as the most hawkish governor, seems to be striking a more dovish tone lately. This shift makes a rate cut this month quite likely, even if the upcoming jobs report shows strong numbers.
There’s an argument to be made for possibly skipping a December rate cut, but all eyes will be on the data to guide that decision. The current monetary policy is restrictive enough that a December cut could still provide plenty of room to ease the rate of subsequent cuts if necessary. Forecasts suggest inflation is on track to hit the 2% target in the medium term, though monetary policy remains significantly tight. We still have “a ways to go” before rates reach a neutral position, with the speed and timing of cuts dependent on ongoing economic conditions.
Looking at a broader spectrum of labor market data, there’s a consistent narrative over the past year—namely, that demand is moderating compared to supply. However, recent inflation data hints that progress might be faltering. If policymakers’ projections for next year’s target range are accurate, the Committee might skip several rate cuts en route to achieving those goals.
With the Fed’s communication blackout set to begin Friday at midnight, Waller’s comments are among the last official insights we’ll get before the silence. But it’s Daley who’s scheduled to speak last this Friday, giving the final glimpse into Fed strategies.
Here’s a key takeaway: recent data suggest that inflation’s progress may have stalled at levels significantly above 2%. This concern raises the question of whether the FOMC should hold the policy rate steady at the upcoming meeting to gather more information on the future trajectory of inflation and economic conditions. Given today’s data and predictions pointing to a continued decline in inflation to the 2% mark over the medium term, I currently favor a policy rate cut at our December meeting. However, this stance could change if surprising new data alters my inflation forecast.
And a notable remark from Waller was, “I feel like an MMA fighter who keeps getting inflation in a chokehold, waiting for it to tap out, yet it keeps slipping out of my grasp at the last minute.”
Waller points to five key indicators that could influence his decision:
– Job Openings and Labor Turnover Survey (JOLTS) on December 3
– Employment Report on December 6
– Consumer Price Index (CPI) on December 11
– Producer Price Index (PPI) on December 12
– Retail Sales Data on December 13
“All of this information will be crucial in deciding whether to cut rates or hold steady. As of now, I’m inclined to continue navigating towards a more neutral monetary policy setting. The policy is restrictive enough that another rate cut at our next meeting won’t dramatically shift our monetary stance and leaves us room to slow down further cuts if needed, ensuring we continue moving towards our inflation target.”
This approach aligns with the market’s anticipation, reflected in a 70% implied probability of a rate cut.
