WASHINGTON- The US is “within striking distance” of the Federal Reserve’s 2 percent inflation goal, but the central bank should not rush to cut its benchmark interest rate until it is clear lower inflation will be sustained, Fed Governor Christopher Waller said on Tuesday.
And regardless of when rate cuts begin, Waller said the central bank should proceed “methodically and carefully,” not make the sort of large, fast reductions used when the Fed is trying to bail out the economy from a shock or a pending downturn.
“The key thing is the economy is doing well. It is giving us the flexibility to move carefully and methodically. We can see how the data comes in, see if progress is being sustained,” Waller said in comments in a moderated online discussion organized by the Brookings Institution. “The worst thing we’d have is it all reverses after we’ve already started to cut. We really want to see evidence that this progress…in the real data and the inflation data continues. I believe it will.”
Waller’s remarks served as a counter to market expectations that the Fed will start cutting rates at its March meeting and lop perhaps 1.5 percentage points from the benchmark policy rate by the end of the year. After he spoke traders pared bets that the Fed would in March reduce a policy rate that has been left in the current range of 5.25 percent to 5.5 percent since July.
The Fed next meets on Jan. 30-31.
If Waller expressed a more careful approach to coming cuts than anticipated by investors, his remarks also showcased the debate taking shape among policymakers on the appropriate pace of cuts, and acknowledged that the emphasis has shifted from controlling inflation alone to managing a more balanced set of risks to ensure the Fed’s maximum employment goal stays in hand as well.
“While the emphasis of policy…has been on pushing down inflation, given the strength of the current labor market the FOMC’s focus now is likely to be more balanced: keeping inflation on a 2 percent path while also keeping employment near its maximum level. Today, I view the risks to our employment and inflation mandates as being more closely balanced,” he said.
