Fed Director Waller dampens interest rate cut fantasy: “Don’t rush things”

The goal of an inflation rate of two percent is “within reach,” he said on Tuesday at an online appearance organized by the Washington think tank Brookings Institution. Nevertheless, changes to the monetary policy stance would have to be “carefully coordinated”. Action should not be rushed.

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This dampened market expectations that monetary policy could be relaxed as early as March. On the futures markets, the probability of this happening after the speech was estimated at less than 60 percent; before that it had been more than 70 percent.

“Methodical and careful”

The Fed must ensure that the risk of a renewed rise in inflation has been averted, emphasized Waller. Regardless of when the interest rate cut will come, it must be approached “methodically and carefully”. Since the economy and labor market are in good condition, there is no reason to reduce interest rates as quickly and comprehensively as was the case in the past – for example in times of crisis.

The US central bank Federal Reserve, which is intended to promote stable prices and full employment, wants to sustainably steer the annual inflation rate, which recently rose to 3.4 percent, towards its target value of 2.0 percent. It did not touch the key interest rates at three meetings in a row after having previously tightened monetary policy significantly. The financial markets are expected to remain silent at the end of the month.

Good arguments for easing?

The US Federal Reserve Banker Loretta Mester recently emphasized that she thought it was still too early to cut interest rates in March. Waller had already raised this issue at the end of November, earlier than other Fed leadership members. There are good economic arguments for easing monetary policy if inflation continues to fall for another few months, he said at the time, triggering fantasies of interest rate cuts.

With their interest rate outlook in December, the US monetary authorities made it clear that after the previous, sometimes aggressive monetary policy increases, they wanted to lower interest rates again in 2024 – probably by 0.75 percentage points. Nobody from the Fed leadership sees interest rates higher at the end of 2024 than they are now, which the central bank recently kept in the range of 5.25 to 5.50 percent.