Fed official says economy is approaching 'sweet spot’ for rate cuts
The U.S. economy is approaching a happy medium for rate cuts, according to Federal Reserve Governor Christopher Waller.
In prepared remarks at the Kansas City Fed, Waller pointed out that recent economic data is consistent with the central bank’s goal of “achieving a soft landing.”
A soft landing refers to a Goldilocks economy in which growth is steady enough to prevent recession but not strong enough to spur inflation.
“While I don’t believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” Waller said.
The Fed official thinks the labor market is in a “sweet spot” characterized by steady job growth and modest wage increases. “To me, this is all evidence of labor supply and demand in balance,” he said.
Piecing together the latest economic indicators, Waller said he “could envision a rate cut in the not-too-distant future.”
For many investors, Waller’s comments carry extra weight because he’s a voting member of the Federal Open Market Committee (FOMC), which sets interest rates.
On July 31, Waller and ten of his colleagues will vote on whether interest rate adjustments are needed.
While many economists are clamoring for an immediate rate cut, futures markets indicate there’s virtually no chance that’ll happen this month.
A little more patience is needed
Although the Fed’s July meeting is expected to be nothing more than a formality, Wall Street is banking on a rate cut in September with near 100% certainty.
According to CME Group’s FedWatch Tool, the likelihood that interest rates stay the same after the September meeting is less than 4%.
September is also when the Fed gives its latest projections for inflation, economic growth, and interest rates. Given slowing inflation, there’s a strong chance that policymakers will dial up their forecasts for more rate cuts this year.
One of the most encouraging signs that the Fed was on track came last month when the core PCE inflation index posted its smallest annual increase since 2020.
At 2.6%, the core PCE index isn’t that far off the Fed’s 2% target.
That being said, New York Fed boss John Williams warned that nothing is certain and that the next few months aren’t just throwaways.
“We’re actually going to learn a lot between July and September,” Williams told The Wall Street Journal in an interview.
“We’ll get two months of inflation data. We’ll get quite a bit of information on the labor market, get a lot of information on things like consumer spending, business spending, and [...] what’s happening around the world,” he explained.
Economists say the forthcoming reports on nonfarm payrolls, retail sales, the Consumer Price Index, and the core PCE could help clarify the Fed’s interest-rate path.