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Fed’s Waller Signals Rate Cut by End of 2024, Conditional on Inflation Data

Key Takeaways

  • Federal Reserve Governor Christopher Waller has signalled a potential rate cut towards the end of 2024, but only if “several more months” of favourable inflation data materialise, shifting from his previously more hawkish posture.
  • The path to a cut remains contingent on key indicators like Core PCE inflation moving demonstrably closer to the 2% target, a condition yet to be met despite some recent moderation.
  • Divergence within the Federal Open Market Committee (FOMC) is evident, with other members expressing greater caution, suggesting that a consensus for easing policy is not yet secured.
  • Markets are pricing in a high probability of at least one rate reduction by year-end, creating a potential disconnect if incoming data does not meet the Fed’s strict criteria, posing a risk of volatility.

A recent, nuanced signal from Federal Reserve Governor Christopher Waller suggests monetary policy may be sufficiently restrictive, potentially paving the way for an interest rate reduction towards the end of 2024. While this represents a notable softening from a historically hawkish voice, his commentary came with a significant caveat: any such move is entirely contingent on observing “several more months” of moderating inflation figures. This data-dependent stance places the Fed at a critical juncture, navigating the narrow path between containing price pressures and avoiding an excessive economic slowdown.

The Conditional Pivot of a Committee Hawk

Governor Waller’s remarks, delivered at the Peterson Institute for International Economics, are significant not for their certainty, but for their conditionality and origin.1 Historically aligned with the more hawkish wing of the FOMC, Waller’s acknowledgement that the policy rate is likely restrictive and that a cut could be considered this year marks a subtle but important evolution. He has effectively laid out a clear, albeit challenging, benchmark for the committee: a sustained trend of disinflation is the non-negotiable prerequisite for any policy easing.

This is not a promise of a rate cut, but rather a transparent outline of the conditions under which one might become appropriate. The emphasis on “several more months” suggests that data points from a single month will be insufficient to sway the committee. The Fed is looking for a convincing pattern of disinflation, particularly within its preferred metric, the core Personal Consumption Expenditures (PCE) price index, which has remained stubbornly above target.

The Data Underpinning the Debate

The debate over the timing of a potential cut is rooted entirely in the incoming economic data. While some indicators show progress, others highlight the persistent nature of underlying price pressures, complicating the Fed’s decision-making process. The latest figures paint a mixed, though cautiously optimistic, picture.

Indicator Latest Reading (April/May 2024) Implication for Fed Policy
Core PCE (YoY) 2.8%2 Moving in the right direction but remains significantly above the 2% target.
Headline CPI (YoY) 3.3%3 Shows easing but services inflation remains a key concern.
Unemployment Rate 4.0%4 Ticked up slightly, providing the Fed some latitude, but the labour market remains broadly resilient.
Fed Funds Rate 5.25% – 5.50%5 Held at a 23-year high, exerting significant restrictive pressure on the economy.

A Committee Divided, A Market Convinced

Governor Waller does not speak for the entire FOMC, and other members have sounded more cautious notes. Minneapolis Fed President Neel Kashkari, for instance, has suggested a preference for holding rates steady for an extended period to ensure inflation is truly defeated.6 This divergence highlights the high bar for achieving a committee consensus. Chairman Jerome Powell has maintained a more central position, consistently reiterating the need for greater confidence that inflation is returning to target before contemplating any cuts.

Despite this, financial markets have been quick to price in a more dovish path. Futures markets, as measured by the CME FedWatch Tool, consistently imply a high probability of at least one 25-basis-point reduction by the end of 2024, with a non-trivial chance of a second. This presents a key risk for investors: markets may be front-running a policy pivot that the underlying data may not ultimately support, creating the potential for significant volatility if inflation remains unexpectedly sticky through the summer months.

Asset Allocation and Second-Order Effects

Should the data align with Waller’s conditions and a year-end cut become the base case, the implications for portfolios are significant. The immediate effect would likely be a further steepening of the yield curve and renewed downward pressure on the US dollar. A weaker dollar would, in turn, provide a tailwind for commodities and for US companies with substantial international earnings.

Within equities, a confirmed dovish pivot would likely catalyse a rotation into more rate-sensitive sectors. This includes not only high-duration technology and growth stocks but also cyclically sensitive areas like industrials and small-cap equities, which have been hampered by higher borrowing costs. The primary risk remains a policy misstep. An early cut that reignites inflation would be far more damaging than maintaining a restrictive stance for slightly too long, potentially forcing a sharp policy reversal in 2025.

The most telling signal for investors may not be the timing of the first cut, but its justification. A rate reduction driven by continued disinflation amid a resilient economy would be unequivocally bullish for risk assets. However, a cut prompted by a significant and unexpected deterioration in the labour market would signal a far more troubling economic outlook, likely triggering a defensive rotation rather than a broad-based rally. Discerning the Fed’s motivation will be as crucial as predicting its actions.

References

1. Waller, C. J. (2024, May 24). Reflections on a Trip to Japan and the Global Economy [Speech]. Peterson Institute for International Economics, Washington, D.C. Retrieved from https://www.federalreserve.gov/newsevents/speech/waller20240524a.htm

2. U.S. Bureau of Economic Analysis. (2024, May 31). Personal Income and Outlays, April 2024. Retrieved from https://www.bea.gov/news/2024/personal-income-and-outlays-april-2024

3. U.S. Bureau of Labor Statistics. (2024, June 12). Consumer Price Index Summary – May 2024. Retrieved from https://www.bls.gov/news.release/cpi.nr0.htm

4. U.S. Bureau of Labor Statistics. (2024, June 7). The Employment Situation – May 2024. Retrieved from https://www.bls.gov/news.release/empsit.nr0.htm

5. Board of Governors of the Federal Reserve System. (2024). Open Market Operations. Retrieved from https://www.federalreserve.gov/monetarypolicy/openmarket.htm

6. Saphir, A. (2024, May 28). Fed’s Kashkari says many more months of good inflation data needed for rate cut. Reuters. Retrieved from https://www.reuters.com/markets/us/feds-kashkari-says-many-more-months-good-inflation-data-needed-rate-cut-2024-05-28/

StockMKTNewz. (2024, June 12). [Post showing Waller’s comments on a potential cut]. Retrieved from https://x.com/StockMKTNewz/status/1805567836833653169

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