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A top Federal Reserve official has said the US central bank is within “striking distance” of returning inflation to its 2 per cent goal, but cautioned rate-setters would “take our time” before cutting borrowing cuts from their current 23-year high.
Christopher Waller, a governor on the Fed’s board, said at an online event hosted by Washington’s Brookings Institution on Tuesday that recent economic and jobs data showed the central bank’s effort to contain price pressures was bearing fruit.
“Based on economic activity and the cooling of the labour market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2 per cent PCE inflation,” he said, referring to the personal consumption expenditures index.
Waller also said job openings may have declined to a point where any further downturn in the labour market could trigger a sharp rise in unemployment. “From now on, the setting of policy needs to proceed with more caution to avoid over-tightening,” he said.
But Waller also cautioned against a rush to slash interest rates, saying the bank must “take our time to make sure we do this right”.
The cautionary tone despite Waller’s confidence on inflation points to the Fed’s unwillingness to commit to rate cuts as quickly as March, as some market participants expect.
Waller’s remarks are being closely watched after a speech he made in November suggested he was increasingly sure the Fed now had the worst bout of inflation for a generation under control, enabling it to take a more dovish stance on interest rates.
The bank’s more dovish shift emerged again at the Fed’s December meeting, which revealed policymakers planned to cut rates by as much as 0.75 percentage points in 2024, compared with current level of 5.25 per cent to 5.5 per cent.
Those 2024 projections have boosted markets’ hopes of a cut as soon as March — although Fed officials have repeatedly rowed back against the idea that it could cut as soon as that.
On the timing of the first cut, Waller said that while the Fed was “close” to achieving its 2 per cent goal, he would “need more information in the coming months confirming or (conceivably) challenging the notion that inflation is moving down sustainably towards our inflation goal”.
It was “hard to believe” that waiting an additional six weeks — the time between rate-setters’ meetings — to cut rates “would have a huge impact on the state of the economy”, Waller added.
He also signalled expectations by some investors that the central bank could make as many as six cuts next year were too aggressive, saying there was “no reason to move as quickly or cut as rapidly as in the past”.
Market pricing of a March cut was barely changed on Monday, at about a 70 per cent probability.
Treasury yields extended gains from earlier in the session following Waller’s remarks on Tuesday. The 10-year yield was up 0.09 percentage points on the day at 4.04 per cent, while the two-year yield was 0.09 percentage points higher at 4.23 per cent. Bond yields rise as their prices fall.
The reaction in stock markets was muted, with Wall Street’s S&P 500 trading 0.3 per cent lower.
Waller also played down data last week which showed inflation as measured by the consumer price index, which is not policymakers’ preferred gauge, had ticked up from 3.1 per cent in November to 3.4 per cent in December, suggesting revisions could show the measure overstated the rise in price pressures.
“Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains,” he said.
“In mid-February, we will get the January CPI report and revisions for 2023, potentially changing the picture on inflation. My hope is that the revisions confirm the progress we have seen, but good policy is based on data, not hope.”
Additional reporting Harriet Clarfelt in New York and Jennifer Hughes in Chicago
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