Fed's Waller Dissents on Rate Hold

Federal Reserve Governor Christopher Waller stirred debate at the recent Federal Open Market Committee (FOMC) meeting by dissenting from the decision to hold interest rates steady. Waller argued in favor of a 25 basis point rate cut, outlining his reasoning in a recently published article.

Why Waller Favors a Rate Cut

Waller's analysis rests on three key arguments:

1. Inflation and Tariff Impact: Waller believes that tariffs represent a one-time increase in the price level and will not lead to persistent inflation. He asserts that as long as inflation expectations remain stable, as they currently are, the central bank should “look through” these transient effects.
2. Monetary Policy and Economic Growth: Waller points out that current economic data suggests monetary policy should be close to neutral, rather than restrictive. He notes that real GDP growth was weak in the first half of the year and is expected to remain subdued in 2025, well below the FOMC members' median estimate for long-run growth.
3. Labor Market and Downside Risks: Despite the seemingly strong labor market, Waller cautions that data indicates a slowing in private sector job growth and increased downside risks. He argues that with underlying inflation near target and limited upside risks to inflation, the central bank should not wait until the labor market deteriorates significantly before taking action to support the economy.

A Dissenting View or Economic Prudence?

Waller stresses his respect for the views of his FOMC colleagues who prefer a “wait-and-see” approach to assess the impact of tariffs on inflation. However, he believes that this approach is overly cautious and could lead to monetary policy falling behind the curve, potentially harming the economy if the labor market weakens before clarity on the tariff impact is achieved.

What are the Risks?

Waller acknowledges that there may not be complete clarity on the impact of tariffs, and emphasizes that once the labor market begins to deteriorate, it often declines rapidly. He warns that waiting until then to take action to support the economy would result in an unnecessary delay in adjusting monetary policy.

Flexibility in Monetary Policy

Waller clarifies that his position does not mean that the FOMC should commit to a predetermined path of rate cuts. He suggests that the committee could begin with a rate cut and then monitor the evolution of economic data. If tariffs do not have a significant impact on inflation, the committee could continue to cut rates at a moderate pace. If inflation or employment significantly overperforms expectations, the committee could pause. However, Waller concludes that there is no reason to keep interest rates at their current levels, thereby risking a sudden downturn in the labor market.