Fed's Waller needs 'several more months' of good inflation data before backing rate cut

By Greg Robb

Fed governor dismisses talk of possible rate hike

The April CPI data was a "welcome relief" but there needs to be a number of soft reports before the U.S. central bank should cut interest rates, Federal Reserve Gov. Christopher Waller said Tuesday.

"In the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy," Waller said in a speech to the Peterson Institute for International Economics.

Waller didn't define what "several" reports meant.

Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said that Waller was pointing to the September meeting for a possible rate cut.

"If it's only about inflation, September is the earliest period the Fed will actively consider cutting rates," Luzzetti said in an interview.

Luzzetti said he expects the Fed to wait until December to ease policy.

The Fed has kept its benchmark rate in the range of 5.25%-5.5% since last July.

In a subsequent interview on CNBC, Waller was a bit more expansive. He said, "If the data were to continue softening throughout the next three to five months, you can think about doing it [a rate cut] at the end of this year."

Fed officials have been reluctant to give any specific calendar dates on when they expect the first cut. Traders in derivative markets expect the Fed to cut rates for the first time in September.

Waller pushed back on fears that the Fed doesn't have its benchmark policy rate high enough to slow demand and cool inflation, saying the April CPI data suggests that progress toward the 2% target has likely resumed.

This means that there isn't a need for further rate hikes, he said.

"Central bankers should never say never, but the data suggests that inflation isn't accelerating and I believe that further increases in the policy rate are probably unnecessary," Waller said.

In his speech, Waller said he expects to see the economy slow over the coming months.

He noted that the ISM factory and service-sector surveys - key leading indicators of the health of the economy - both were in contraction territory in April, the first time this has happened in four years.

Another sign of moderation was the flat reading in April retail-sales data, where prior gains were also revised lower.

"One month does not constitute a trend, but this data suggests that policy is doing its job to moderate aggregate demand, which will support renewed progress in lowering inflation," Waller said.

The Fed governor, who used to teach economics at the University of Notre Dame, said he gave the April CPI data "a C+," meaning "far from failing but not stellar either."

Using the April CPI and PPI data, Waller said most forecasts expect a 0.23%-0.25% gain in the personal-consumption expenditures index, the Fed's favorite inflation measure.

During the Q&A session, Waller said the higher inflation in the first quarter couldn't be ignored.

"After three months, it can't be these temporary seasonal things. There's something more fundamental going on that is making inflation a little stickier than what we saw at the end of last year. We're still all trying to figure out what it is," he said.

What grade does he need to see so he can support a rate hike? Waller said he was keeping that to himself for now.

"I look forward to the day when I don't have to go out two or three decimal places in the monthly inflation data to find the good news," Waller said.

Waller said the Fed was trying to slow the economy, but didn't want demand to crater. There were no signs of immediate concern about the economy, he added.

"We're not seeing anything right now that looks like staying here for three or four months is going to cause the economy to go off the cliff," he said.

-Greg Robb

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05-21-24 1356ET

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