Evening Brief – 01.16.24
Federal Reserve Governor Christopher Waller’s comments on Tuesday were initially more of the same – data-dependent, getting toward the central bank’s inflation objective, be cautious about easing financial conditions, and the market is overly optimistic about 2024 monetary policy.
However, the level of detail he provided drove equity markets significantly lower, and US Treasury yields higher.
“I am becoming more confident that we are within striking distance of achieving a sustainable level of 2% PCE inflation,” Waller said in prepared remarks at a virtual event hosted by the Brookings Institution in Washington D.C.
“As long as inflation doesn’t rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year.”
However, Waller repeated his support for three interest rate cuts rather than the six the market is pricing in. “This view is consistent with the FOMC’s economic projections in December, in which the median projection was three 25-basis-point cuts in 2024”.
He clearly does not see the need for aggressive interest rate cuts. “When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully,” he said.
“With economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past.”
He repeated that the timing of easing policy and the level “will depend on the incoming data,” specifically calling out the surprising strength in the December jobs report as “largely noise” against a trend of ongoing moderation. He noted several jobs reports last year have been revised lower, and “there is a good chance December will be revised down.”
The remarks sparked a quick rejiggering of interest rate expectations, sending the probability of a cut in March sharply lower. The message from Waller, and other FOMC members recently, appears to be getting through to the market, albeit cautiously: don’t expect more than six cuts this year, and don’t bet on a March cut.