Here Are Three Economic Scenarios the Fed’s Waller Is Watching For

Key Takeaways

• On Monday, the Federal Reserve’s Christopher Waller outlined three economic scenarios and the path forward for rate cuts—though he says his “baseline” calls for lower rates in 2025.
• Waller said in published remarks that a “pause” in rate cuts might be on the table “if inflation picks back up but the labor market stays robust.
• Investors are watching to see what the Fed will do at its next meeting in November after stronger-than-expected inflation and job reports. Futures traders broadly expect a quarter-percentage-point cut.

Federal Reserve Governor Christopher Waller is preparing for three scenarios that might affect the central bank’s monetary policy choices—but no matter which one might occur, he expects lower interest rates in 2025. 

“Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year,” Waller said in prepared remarks released in conjunction with an appearance Monday.

His remarks come after the Fed cut its key federal funds rate for the first time since 2020 in September and ahead of its next policy meeting in early November.

Since the policy committee’s last meeting, data showed more jobs were created than economists expected and food prices pushed inflation higher than analysts’ projections in September. Both are important to central bankers as they decide how to balance their dual mandate of promoting employment and taming inflation through rate cuts.

While the Fed cut rates by half a percentage point last month, Waller thinks differently about what should be next for rates.  

“I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting,” Waller said. 

Waller thinks there are three economic possibilities moving forward:

• The U.S. economy stays resilient, with inflation near the Fed’s 2% annual target and a modest increase in the unemployment rate. In that case, the Fed “can proceed with moving policy toward a neutral stance at a deliberate pace,” Waller said. “In this circumstance, our job is to keep inflation near 2% and not slow the economy unnecessarily.”
• In a scenario he views as less likely, Waller said inflation could drop below the central bank’s annual target, or the labor market could “significantly” weaken. In this case, the Fed “may suddenly be behind the curve, and that message would argue for moving to neutral more quickly by front-loading cuts to the policy rate,” he said.
• Finally, if inflation picks back up but the labor market stays robust, the Fed could pause rate cuts “until progress resumes and uncertainty diminishes,” Waller said.

Traders are pricing in an 86% chance that the Federal Reserve will cut the fed funds rate by a quarter of a percentage point at its November meeting, according to the CME Group’s FedWatch tool, which forecasts rate movements based on fed funds futures trading data.

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