Fed Waller: "The Case For Cutting Now", Or the Case for the Fed Chair Job Now?

Federal Reserve Governor Christopher J. Waller's speech, "The Case For Cutting Now," delivered at the Money Marketeers of New York University, was intriguing from both political and policy perspectives. His economic rationale for a formal rate reduction at the July 29-30 FOMC meeting was, at best, puzzling, and the timing appeared politically motivated. With the Fed's independence facing substantial pressure, it is crucial for those making monetary policy decisions to remain apolitical.

It is exceedingly uncommon for a Fed Governor to dissent at an FOMC meeting, as demonstrated by the fact that there have only been a few dissents by Fed Governors in the past decade or more. It is even rarer for the rationale behind a dissenting vote to be expressed and made public before the FOMC meeting.

Considering the political pressure aimed at Fed Chair Powell in recent days and weeks, it is worth considering if there was a political agenda influencing the timing and content of Mr. Waller's speech, particularly because he was named by the current administration as a candidate for the Fed Chair role. (On CNBC last week, Mr Waller stated, "If the President asked me to do the Fed chair job, I would say yes.")

Mr. Waller's rationale for a rate cut at this time is questionable, even when political factors are set aside. For instance, Mr. Waller asserts, "tariffs are one-off increases in the price level and do not cause inflation beyond a temporary spike." Yet, he offers no evidence to support this claim.

Mr. Waller's assertion regarding tariffs being a one-time impact on inflation might hold some truth if the tariffs implemented by the Trump administration were consistent, even, and applied simultaneously. However, the tariff policy is erratic and uneven, with some of the largest increases affecting essential materials like steel, aluminum, and copper, which will continually elevate production costs and price pressures in the US.

However, Mr. Waller states that even if tariffs have a greater effect on inflation, it will not alter or affect his perspective on the implications for monetary policy. Why? Mr. Waller contends that, despite recent increases in individual price expectation surveys, there is no evidence of an "unanchoring of inflation expectations." He considers surveys of people's inflation expectations, which have shown a significant jump in recent months, two or three times above the Fed's 2% inflation target, to be "unreliable." Rather, he relies more on those who predict inflation expectations in the financial markets. In other words, he trusts individuals who wager on future inflation rather than those who deal with it daily.

Mr. Waller cites labor market trends as a reason to lower rates now, stating that "private sector job gains are near stall speed and flashing red." However, he overlooks that the Fed's labor market mandate focuses on the unemployment rate, not private sector jobs, which, at 4.1%, is below the Fed's long-term target. He mentioned that a significant slowdown in "net immigration" might be contributing to the sluggish growth in private sector jobs, but acknowledged that understanding its impact on employment will take time.

Additionally, Mr. Waller does not address how "uncertainty" over tariff policy is affecting hiring decisions, despite it being a common theme in the Fed's July Beige Book report.

Nevertheless, Mr. Waller is willing to wait and see how immigration affects the labor markets, but is not prepared to wait to evaluate the impact of Trump's tariff policy on current and future inflation.

Mr. Waller has only one vote at the FOMC, but his vote could be very "LOUD" because the Administration is likely to use it as an additional tool to influence Fed policy. Federal Reserve independence can only be preserved if those responsible for implementing monetary policy decisions avoid political involvement.