Top Federal Reserve Official Advocates For Lowering Interest Rates ‘Carefully’

Christopher Waller testifies before the Senate Banking, Housing, and Urban Affairs Committee during a hearing on his nomination to be member-designate on the Federal Reserve Board of Governors, in Washington, on Feb. 13, 2020. Sarah Silbiger/Getty Images

A top Federal Reserve official thinks the U.S. central bank should “methodically and carefully” lower interest rates when the time is right to loosen monetary policy conditions.

In a prepared virtual speech at the Brookings Institution on Jan. 16, the Fed governor Christopher Waller asserted that the benchmark Fed funds rate will likely come down this year “as long as inflation doesn’t rebound and stay elevated.”

Should data remain “as good as it gets,” referencing solid economic growth and jobs numbers, policymakers should take their time relaxing monetary policy.

“When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” Mr. Waller told host David Wessel.

“In many previous cycles, they cut rates reactively and did so quickly and often by large amounts. This cycle, however, I see no reason to move as quickly or cut as rapidly as in the past.”

In response to 40-year high inflation, the Fed raised interest rates 11 times since March 2022, lifting the policy rate to a 22-year high of around 5.25 percent.

Mr. Waller shied away from offering a timetable for rate cuts.

The futures market has been frequently shifting its Fed pivot expectations amid the unexpected reacceleration in the December consumer price index (CPI).

Still, investors are penciling in a quarter-point rate cut at the March Federal Open Market Committee (FOMC) policy meeting, data from the CME FedWatch Tool show.

Last month, the annual inflation rate shot up to a hotter-than-expected 3.4 percent. The core CPI, which excludes the volatile energy and food sectors, also came in at a higher-than-expected 3.9 percent.

Meanwhile, the Fed official noted the treasure trove of statistics makes him “more confident” that inflation is on a path toward achieving the institution’s 2 percent target rate.

In the fourth quarter, the U.S. economy is expected to have expanded between 1 percent and 2 percent.

On the labor front, the country continues to add tens of thousands of new jobs, although economists have alluded to various concerns in the Bureau of Labor Statistics’ monthly employment data.

All this is happening as the annual inflation rate has eased from the June 2022 high of more than 9 percent while averting a recession.

“But will it last?” Mr. Waller asked. “In the end, I am feeling more confident that the economy can continue along its current trajectory.”

Balance Sheet Tapering

For nearly two years, the Fed has been trimming its balance sheet, which had soared to an all-time high of $8.934 trillion in the wake of the coronavirus pandemic.

As part of the central bank’s quantitative tightening campaign, officials have been tapering the body’s balance sheet, comprised mainly of Treasury and mortgage-backed securities, by about $95 billion per month.

Since then, the Fed has reduced its holdings by approximately $1.4 trillion.

While Fed Chair Jerome Powell and his colleagues have not established a timeline or a target of when to halt the tapering initiative, Mr. Waller thinks monetary authorities can start discussing a slowdown soon.

A trader works, as a screen displays a news conference by Federal Reserve Board Chairman Jerome Powell following the Fed rate announcement, on the floor of the New York Stock Exchange in New York City on Dec. 13, 2023. Brendan McDermid/Reuters

“I would say sometime this year will be a reasonable thing to start thinking about it,” he said, adding that it would only apply to Treasurys and not MBS holdings.

Other central bankers have pontificated on slowing the balance sheet runoff.

Dallas Fed Bank head Lorie Logan told the International Banking, Economics and Finance Association and the American Economic Association earlier this month that decelerating the tapering pace could allow the institution to continue its runoff efforts and reduce “the likelihood that we’d have to stop prematurely.”

“Normalizing the balance sheet more slowly can actually help get to a more efficient balance sheet in the long run by smoothing redistribution and reducing the likelihood that we’d have to stop prematurely,” Ms. Logan stated.

She purported that the latest increase in Treasury debt issuance and “a less uncertain interest rate path” have led to more money market (short-term debt securities) funds to invest greater amounts into Treasurys, something that could force struggling banks to dip into their supply of reserves.

But Ms. Logan, who had managed the New York Fed’s portfolio between 2019 and 2022, noted that “money markets and policy implementation are continuing to function smoothly.”

What Other Fed Officials Are Saying

Financial markets think the Fed could start its series of rate cuts as early as the spring. But a chorus of Fed officials says these expectations are too early.

Cleveland Fed President Loretta Mester told Bloomberg Television in a Jan. 11 interview that the recent inflation data suggest the Fed “has more work to do.”

“I mean, it’s hard to predict the future, as you know, and it’s really going to be dependent on how the economy evolves,” Ms. Mester, who is set to retire from her post this year, said.

“I think March is probably too early in my estimation.”

In a Jan. 10 speech before the Bronx EDC and BICNY’s 2024 Regional Economic Outlook, New York Fed chief John Williams believes interest rates need to stay high “for some time” until monetary policymakers are confident the inflation rate is returning to a sustainable 2 percent.

“The data indicate that we are clearly moving in the right direction,” he said. “However, we still are a-ways from our price stability goal.”

According to the December Summary of Economic Projections, the Fed signaled three rate cuts in 2024 and two more in 2025.

The next two-day rate-setting committee meeting is scheduled for Jan. 30-31.