Fed Governor Speaks: Waller Hints at More 50bp Cuts, Bowman Cautious

Federal Reserve Governor Michelle Bowman said on Friday that the Fed is not yet at the point of declaring victory in the fight against inflation.

Bowman was the sole dissenter at the Fed's meeting on Wednesday, where she voted against a 50 basis point rate cut, preferring instead a 25 basis point reduction.

The other 11 members of the Federal Open Market Committee (FOMC) supported the decision to make a significant rate cut.

In her statement, Bowman said she agreed that it was time to ease monetary policy but preferred a more gradual approach.

She was concerned that a substantial rate cut could be misinterpreted as the Fed prematurely declaring victory on its price stability mission.

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The Fed has two main responsibilities: to maximize employment and maintain price stability, with a target of keeping annual inflation around 2%.

Bowman believes that although inflation has slowed down after picking up in early 2024, the current price increases are still too high.

According to the latest data, the core personal consumption expenditure (PCE) price index rose by 2.6% year-over-year in July.

In contrast, Federal Reserve Governor Christopher Waller has a different view.

Waller pointed out that inflation data has been moderating in recent months, and if this trend continues, the inflation rate could be below the Fed's annual target.

He said in a media interview: "The current economic conditions are strong, inflation is falling, and we want to maintain this trend."

Waller also mentioned that if the upcoming employment data is poor and inflation continues to slow down, the Fed might take more 50 basis point rate cuts.

However, if inflation rebounds, the Fed may pause further rate cuts.

Waller supports a more significant rate cut because he believes inflation is falling faster than expected.

He mentioned that the annual increase in the consumer price index (CPI) was 2.5% in August, lower than expected, but core prices have risen due to the rebound in housing costs.

Waller estimated that the core PCE price index would rise by 0.14% month-over-month in August based on CPI and producer price index (PPI) data.

If his forecast is accurate, then the annualized core PCE inflation rate over the past four months would be below 1.8%, significantly lower than the Fed's 2% target.

Despite differences in the market and among some officials about the magnitude of rate cuts, Waller emphasized that the Fed's current policy setting is still well above the "neutral rate" level, which is the interest rate level that neither stimulates nor restrains economic activity.

He believes that the Fed has considerable room to further lower interest rates over the next six to twelve months.

According to the Fed's economic forecast released in September, there could be a 1 percentage point rate cut in 2024 and another 1 percentage point cut in 2025, bringing the interest rate target to between 3.25% and 3.5%.

Overall, despite internal disagreements within the Fed, officials are still working hard to achieve the inflation target and maintain economic stability, and the next policy adjustment will depend on future economic data performance.