Federal Reserve Governor Christopher Waller said on Friday he supported cutting interest rates by half a percentage point at this week’s meeting because inflation is falling even faster than he expected.
Citing recent consumer and producer price data, Waller told CNBC the data showed core inflation, excluding food and energy, the Fed’s preferred measure, has been below 1.8% over the past four months. The Fed targets annual inflation at 2%.
“That’s what set me back to say, wow, inflation is coming down a lot faster than I thought it would, and that set me back to say, look, I think 50 [basis points] it’s the right thing to do,” Waller said during an interview with CNBC’s Steve Liesman.
Both the consumer price index and the producer price index showed increases of 0.2% for the month. On a twelve-month basis, the CPI fluctuated at a rate of 2.5%.
But Waller said the latest data showed an even stronger trend lower, giving the Fed room to ease more as it turns its focus to supporting an easing labor market.
A week before the Fed meeting, markets overwhelmingly priced in a 25 basis point cut. One basis unit equals 0.01%.
“The thing is, we have room to move, and that’s what the committee is signaling,” he said.
The Fed’s move to cut by half a percentage point, or 50 basis points, lowered its key lending rate to a range between 4.75%-5%. Along with the decision, individual officials signaled the possibility of another half-point in cuts this year, followed by a full percentage point reduction in 2025.
Fed Governor Michelle Bowman was the only member of the Federal Open Market Committee to vote against the reduction, preferring instead a smaller cut of a quarter percentage points. She released a statement Friday explaining her opposition, which marked the first “no” vote by a governor since 2005.
“While it is important to recognize that significant progress has been made in reducing inflation, while structural inflation remains around or above 2.5%, I see the risk that the Commission’s broader policy action will be interpreted as a premature declaration of victory on the stability of our prices. order,” Bowman said.
As for the future path of interest rates, Waller said there are a number of scenarios that could play out, each depending on how the economic data plays out.
Futures prices shifted after Waller’s remarks, with traders now pricing in about a 50-50 chance of another half-percentage-point cut at the Nov. 6-7 meeting, according to CME Group’s FedWatch.
“I was a big proponent of big rate hikes when inflation was moving much, much faster than any of us expected,” he said. “I would feel just as negative about protecting our credibility to maintain the 2% inflation target. If the data starts to look soft and continues to look soft, I would be much more willing to be aggressive on rate cuts to achieve inflation closer to our target”.
The Fed takes another look at inflation data next week when the Commerce Department releases its August report on the personal consumption expenditure price index, the central bank’s preferred measure. Chairman Jerome Powell said Wednesday that Fed economists expect the measure to show that inflation is running at an annual rate of 2.2 percent. A year ago it was at 3.3%.
