(Kitco News) – Recent data support the view that inflation is moving sustainably toward its target, and the most likely scenarios imply that the time for a cut to the benchmark rate is approaching, according to Federal Reserve Governor Christopher Waller.
Speaking at the Federal Reserve Bank of Kansas City just days before the Fed’s July blackout period is set to begin, Waller took the opportunity to reinforce the dovish comments made by Federal Reserve Chair Jerome Powell on Monday. The Federal Open Market Committee (FOMC) member said that after the second quarter’s poor inflation reports, “data on inflation and the labor market moderated in a way that suggests progress toward price stability has resumed.”
“The data over the past couple months shows the economy growing at a more moderate pace, labor supply and demand apparently in balance, and inflation slowing from earlier this year,” Waller said. “I believe current data are consistent with achieving a soft landing, and I will be looking for data over the next couple months to buttress this view. So, while I don't believe we have reached our final destination, I do believe we are getting closer to the time when a cut in the policy rate is warranted.”
After a review of the economic outlook and the state of inflation and employment, Waller turned to the implications for monetary policy. “[T]he changes in the data this year have made it hard to formulate an outlook for policy that would apply to the range of possible paths the economy may take,” he said, outlining the two major risks he sees.
“On the one hand, it is essential that monetary policy get inflation down to a sustained level of 2 percent,” he said. “If we start to loosen policy too soon, and allow inflation to flare up again, we risk losing credibility with the public and allowing expectations of future inflation to become unanchored.”
“The other risk is that we wait too long to ease monetary policy and contribute to a significant economic slowdown or a recession, with unemployment rising notably.”
Waller then laid out three different economic scenarios for 2024, each with their own implied path for interest rates.
“The first scenario is the optimistic one,” he said. “Here we continue to receive more very favorable CPI inflation reports, with implications for very favorable PCE inflation readings as well. This would give us a nice run of inflation data starting in May. I see a significant but not high probability of this scenario occurring. And, in that circumstance, I would have much greater confidence in inflation moving sustainably toward 2 percent. In this scenario, I could envision a rate cut in the not-too-distant future.”
The second scenario Waller characterized as “a bit less optimistic” but said it was also more likely to occur. “In this case, the inflation data comes in uneven—not as good as the previous few months but still consistent overall with progress on bringing inflation down toward 2 percent,” he said. “Here, with the uneven data, it would be a matter of timing as to when I thought we are making sustainable progress to 2 percent inflation. In this case, a rate cut in the near future is more uncertain.”
Waller’s final scenario is the most pessimistic. “In this case, if we were to see a significant resurgence in inflation in the second half of 2024, it would be tough to conclude we were making sustainable progress on inflation this year,” he said. “While this pessimistic outcome is possible, I put a low probability on it happening given the recent data we have received.”
The FOMC member underlined that his view of the appropriate policy path is data-dependent.
“As always, my judgments about appropriate policy will consider the totality of the data, including importantly the signals we receive about the state of the labor market, which has eased and now looks to be in balance,” he said. “But for the purpose of clearly communicating my thinking about the stance of policy over the next several months, I think these scenarios are helpful. And given that I believe the first two scenarios have the highest probability of occurring, I believe the time to lower the policy rate is drawing closer.”
Gold prices rallied shortly after the text of Waller’s speech was published at 9:30 am EDT, with spot gold setting a new all-time high of $ 2,483.74 per ounce just before 10 am before seeing a pullback. Spot gold is now trading at session lows as it tests the $2,460 level of support.
