- Fed Governor Christopher Waller signals potential rate cuts in 2025 if disinflation continues.
- Core inflation metrics are nearing the Fed’s 2% target, fueling optimism.
- Market expectations shift towards two rate cuts, with the first possibly coming in May.
Federal Reserve Governor Christopher Waller’s comments on Thursday indicate that the central bank could cut interest rates sooner than expected if inflation continues to ease.
Waller noted that the Personal Consumption Expenditures (PCE) Price Index, excluding food and energy, has been close to the Fed’s target for most of the past eight months. This suggests that the disinflationary trend is likely to persist.
Fed’s Waller Hints at Potential Rate Cuts in 2025 as Inflation Eases
Waller’s optimistic outlook contrasts with market expectations, which had anticipated a more gradual approach to rate cuts. While traders were initially forecasting a pause in rate adjustments until June, Waller‘s remarks led them to shift expectations, betting on two rate cuts, with one potentially coming as early as May. This change also resulted in a drop in bond yields.
Waller’s comments indicate optimism for a more rapid return to the Fed’s inflation target, with potential rate cuts occurring as early as the first half of 2025. He noted that if inflation continues to cool and the labor market remains strong, the Fed could begin to ease rates in the coming months. A reduction of three or four quarter-percentage points is still possible, contingent on future inflation data.
Following Waller’s remarks, market expectations shifted significantly. Traders, who had initially expected the Fed to pause rate hikes until June, now believe that rate cuts could start as early as May. This shift in expectations led to a decline in bond yields as investors recalibrated their outlooks for Fed policy.
The potential for faster rate cuts reflects a broader shift in sentiment about the state of inflation and economic growth. Waller’s optimistic comments add a degree of uncertainty about the timing of the Fed’s next moves, suggesting that market participants will need to monitor upcoming economic reports closely to gauge the trajectory of monetary policy.
Waller’s optimistic comments on disinflation may lead to faster rate cuts than markets expected, reshaping expectations about the Fed’s policy path.
“If we continue getting numbers like this, it is reasonable to think rate cuts could happen in the first half of the year,” said Waller, expressing confidence in continued disinflation.
