Exact Timing of Rate Cut ‘Doesn’t Matter,’ Fed Gov. Christopher Waller Says

WASHINGTON, DC - FEBRUARY 13: Christopher Waller testifies before the Senate Banking, Housing and Urban Affairs Committee during a hearing on their nomination to be member-designate on the Federal Reserve Board of Governors on February 13, 2020 in Washington, DC. (Photo by Sarah Silbiger/Getty Images)

Federal Reserve officials have been coy about when they will agree to cut interest rates.

The financial markets expect the U.S. central bank to pull the trigger on the first rate cut at the September policy meeting. But one monetary policymaker thinks the precise timing of when the institution will pivot doesn’t matter a whole lot.

Fed Gov. Christopher Waller, in comments at an event by the Federal Reserve Bank of Kansas City on July 17, said that whether the monetary authorities pivot in September or December “doesn’t matter” from a macroeconomic perspective unless there is an enormous shock to the U.S. economy in the next few months, which, he noted, is unlikely.

Mr. Waller said changes to the policy rate come with a long and variable lag, meaning that the effects of a reduction wouldn’t be observed in the broader economy for a while.

“There’s a lot of rational attention by the markets on what meeting it’s going to be,” he said. “But as a policymaker, our job is not to try to say whether it should or shouldn’t be one meeting or another.”

Achieving the Fed’s dual mandate—price stability and maximum employment—is what matters, according to Mr. Waller.

“It’s not a particular meeting. It’s when do we think the conditions are right to go, and that’s it,” he said.

Based on recent inflation data, Mr. Waller is confident that the Fed is inching closer to achieving its objective of returning inflation to its 2 percent target. That means that the central bank is inching closer to the time when a cut to the benchmark federal funds rate is warranted, he said.

“While I don’t believe we’ve reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted,” he said in prepared remarks.

Investors are pricing in a more than 90 percent chance of a quarter-point rate cut at the policy-making meeting of the Federal Open Market Committee (FOMC) in September. Traders are also starting to pencil in another rate cut at either the November or December meeting.

That’s in contrast to the updated Summary of Economic Projections that suggests officials anticipate only one 25-basis-point reduction.

Monetary Policy Lags

Citing the work of eminent economist Milton Friedman in the 1950s and 1960s, Fed economists have iterated the lag between monetary policy actions and their intended economic effects.

In a 1972 paper titled, “Have Monetary Policies Failed?” Mr. Friedman asserted that it could take up to two years before the full effects of monetary decisions are witnessed.

“The lag is not only long but it is also variable; that is, the time between cause and effect can differ from episode to episode in a way that is difficult to predict,” Bill Dupor, a senior economic policy adviser at the Federal Reserve Bank of St. Louis, wrote in a May 2023 paper.

Milton Friedman, recipient of the 1976 Nobel Prize for Economic Science, speaks during a White House event in Washington, on May 9, 2002. (Getty Images/Alex Wong)

However, modern economists have debated the length of time it can take to observe the effects of monetary policy adjustments in the wider economy.

“The markets had to kind of go figure out that the Fed was in there doing something,” Mr. Waller said at a Council on Foreign Relations event in January 2023. “That’s not how we do things anymore. We start telling people in advance.”

That’s why Richmond Fed President Tom Barkin doesn’t think the first quarter-point rate cut matters a great deal, telling the Greater Prince George’s Business Roundtable on July 17 that changing the narrative is what is crucial.

Like his colleagues, he’s pleased by some of the data that would support the case for a rate reduction.

“I have been very encouraged both by the last couple months of non-housing services and by what might be the start on the housing side,” Mr. Barkin said. “I'd like to see that continue.”

The prevalence and frequency of economic indicators may offer insights into how Fed policy influences inflation, the labor market, and the broader economy. Money supply data and the Fed’s balance sheet are also published weekly for market watchers to comb through.

Still, the central bank operates on the assumption of “long and variable lags.” Fed Chair Jerome Powell cited the concept at an Economic Club of Washington discussion on July 15 as a reason why the officials don’t have to wait until inflation touches 2 percent before cutting interest rates.

The next two-day FOMC policy meeting will take place on July 30–31.