Fed governor ‘sees a lot of room’ for more rate cuts over next year

Federal Reserve Governor Christopher Waller thinks the central bank’s September interest rate cut was the start of a much larger easing cycle that will continue well into 2025.

In an interview with CNBC, Waller said, “We’re at a point where the economy is strong, inflation is coming down, and we want to keep it that way.”

The Federal Open Market Committee (FOMC) “sees a lot of room to move down over the next six to 12 months, and that’s really what we should be focusing on,” said Waller.

Waller was one of the 11 FOMC members who voted to lower rates by 50 basis points on Sept. 18. The unorthodox move was a major shift for a central bank known for being reactionary rather than proactive.

The FOMC’s updated quarterly forecast expects rates to fall to 3.5% by the end of 2025. This implies six rate cuts over the next 15 months, assuming the Fed maintains its standard quarter-point reductions.

Fed Chair Jerome Powell said policymakers have no intention of making large rate cuts the norm.

“I do not think that anyone should look at this and say, ‘Oh, this is the new pace,’” Powell following the September FOMC meeting.

Economists who have long criticized the Fed think policymakers are still playing catch-up after sitting on their hands for so long. Yet, others think the September rate cut will be remembered as a bold move.

Regaining credibility

Queens’ College president Mohamed El-Erian believes the Fed is in a tricky spot after its September meeting. He noted the apparent contradiction in making a large rate cut while claiming that “the economy is in a good place.”

Powell “didn’t want to acknowledge that [the 50 basis-point] move is a catch-up for not having reduced rates in July,” said El-Erian.

Market strategist Sven Henrich also drew parallels between the Fed’s latest move and the ones that preceded the 2008 financial crisis.

Henrich reminded that the Fed’s 50 basis-point cut in September 2007 wasn’t enough to prevent a recession, which actually began in December of that year.

Despite the criticism, former Fed economist Julia Coronado thinks policymakers stepped outside their comfort zone in September, which means they’re prepared to take stronger action to prevent a recession.

“Now they have credibility,” Coronado told Bloomberg. “So, if they get more weakness in the labor market, we can trust that they will respond.”

While the Fed may have been late in cutting rates, 74% of economists and fund managers in a recent CNBC survey believe policymakers are still on track to preserve a “soft landing” for the economy.

“While there are economic risks on the horizon, the coming Fed cuts will be much closer to a ‘mid-cycle correction’ trend,” like the ones seen in 1995, 1997, and 2019, said Guy LeBas, a fixed income strategist at Janney Montgomery Scott.

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