Fed's Waller Sends Shiver Down Investors' Spines: 'There Is No Rush To Cut' Interest Rates

Federal Reserve Governor Christopher J. Waller starkly opposed the idea of cutting interest rates amidst current macroeconomic conditions characterized by the recent unexpectedly high inflation figures.

Speaking at the Economic Club of New York on Wednesday, March 27, Waller said, “There is no rush to cut the policy rate,” underscoring a cautious approach toward Fed interest rate policy.

See Also: Investors On Edge With Consumer Inflation Data Due Friday, Rate Cut Hopes Hang In The Balance

Waller’s Perspective On Rate Cuts: Caution Amid Inflation Uncertainty

Waller’s remarks highlighted a sense of uncertainty clouding the disinflationary progress observed so far this year.

He expressed concern that “shorter-term inflation measures are now telling that progress has slowed and may have stalled. But we will need more data to know that,” indicating a wait-and-see approach to monetary policy adjustment.

“In my view, it is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data,” Waller said.

Despite a projected slowdown in real GDP growth to 2.1% in the first quarter of 2024 from an average of around 4% in the latter half of 2023, Waller noted that the growth still remains robust, according to the Atlanta Fed’s GDPNow model, indicating a less urgency for the Fed to cut rates.

Waller is keenly awaiting the February data on personal income and spending due this Friday, which could further influence the Federal Reserve’s policy direction.

The Fed governor emphasized the importance of substantial and sustained improvement in inflation data before considering rate cuts.

He noted that, barring a significant economic downturn, “at least a couple of months of better inflation data” would be necessary to trigger a shift towards easing monetary policy.

Waller remarked that “monetary policy is data-driven,” and he made a critical comparison between the Federal Reserve’s December 2023 projections and the most recent ones.

“The dots for 2024 have moved up, meaning at least several policymakers removed one or more cuts from their projection,” he said.

Significantly fewer policymakers now expect more than three cuts in 2024, while an increased number anticipate two or fewer. This adjustment suggests a balanced reaction from the Committee, neither overreacting to recent data nor completely disregarding it.

Market Reactions And Analyst Views

Following Waller’s speech, the U.S. dollar index, as tracked by the Invesco DB USD Index Bullish Fund ETF UUP, surged to its highest level since mid-February, and the likelihood of a June rate cut dipped slightly, from a 70% to a 64% chance, signaling investor recalibration of interest rate expectations.

Bank of America rates strategist Mark Cabana outlined two scenarios for the U.S. economy: one where persistent growth and inflation preclude rate cuts this year, and another where a sharper-than-expected slowdown could trigger more aggressive rate cuts.

“We see roughly even probability between these two outcomes and therefore view risks to our rate outlook as balanced,” he said.

Now Read: US Economic Growth Upwardly Revised To 3.4% In Q4, Jobless Claims Slow: Thursday’s Economic Digest (UPDATED)

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