Federal Reserve Governor Christopher Waller believes that the recent string of robust economic and inflation data argues against rushing to cut the federal-funds rate. Speaking at an event organized by the Economic Club of New York, Waller highlighted the continued strength in economic output and the labor market, coupled with a slowdown in progress towards reducing inflation. As a voting member of the Federal Open Market Committee (FOMC), Waller emphasized the need for prudence in adjusting monetary policy, considering the current economic landscape.
Despite his expectation that inflation will eventually trend towards the Fed’s target of 2% annually, Waller stressed the importance of exercising caution in lowering interest rates given the recent economic indicators. He advocated for maintaining the current restrictive stance on interest rates for a potentially longer period to ensure a sustainable trajectory towards the inflation target.
The FOMC has kept the federal-funds rate within a range of 5.25% to 5.5% since July 2023. While market expectations imply a high probability of a rate cut at the June meeting, Waller’s remarks indicate a preference for a more measured approach. He underscored the need for the committee to assess the data carefully and prioritize achieving sustainable inflation levels before considering further monetary policy adjustments.
Waller’s stance aligns with his previous remarks in late February, where he questioned the necessity for immediate rate cuts. Reiterating his position in his recent speech titled “There’s Still No Rush,” Waller emphasized the luxury of time afforded by the current economic strength. He emphasized the importance of safeguarding progress on inflation while acknowledging the minimal risk associated with delaying policy easing in the current economic environment.
Federal Reserve Governor Christopher Waller emphasized the significant role played by a surge in labor productivity in driving faster-than-expected economic growth in the latter part of 2023. Labor productivity, which measures the amount of output per unit of labor, increased at a close to 4% pace over the final three quarters of the year, marking a notable departure from its relatively stagnant trend over the previous 15 years. This surge in productivity has the potential to bolster both output and workers’ incomes without exerting upward pressure on inflation, thereby fostering broadly shared prosperity.
However, Waller expressed skepticism regarding the sustainability of this productivity growth, citing historical volatility in productivity data and the average annual growth rate of 1.25% over the past two years. He suggested that the surge in productivity at the end of 2023 may have been a temporary correction for previous sluggish growth rather than a long-term trend.
While investments in infrastructure, advancements in artificial intelligence, and a surge in new business formation could contribute to future productivity growth, Waller doubted their ability to fully explain the 2023 increase. Moreover, he dismissed pandemic-induced shifts to remote or hybrid work as one-off factors unlikely to be replicated in the future.
The trajectory of productivity growth holds implications for monetary policy in the long term, particularly in determining the so-called neutral rate of interest—the rate that neither stimulates nor restricts economic activity. A sustained increase in productivity could signal a higher neutral rate of interest, which, in turn, would influence the Federal Reserve’s approach to adjusting interest rates, potentially leading to a shallower rate-cutting cycle.