WASHINGTON, D.C. — Federal Reserve Governor Christopher Waller, in a detailed address delivered on Wednesday, suggested that the prospect of imminent interest rate cuts is becoming more plausible, contingent upon continued favorable data concerning inflation and employment. Speaking at a program hosted by the Kansas City Federal Reserve, Waller conveyed that while an immediate reduction in interest rates may not be forthcoming, the potential for such a move is increasing if economic indicators continue to align favorably.

“I believe current data are consistent with achieving a soft landing,” Waller remarked. “I will be looking for data over the next couple of months to buttress this view.” His statements reflect a cautious optimism regarding the economic trajectory, implying that the Federal Open Market Committee (FOMC) may find it appropriate to lower the policy rate if the economic conditions remain stable.

Waller's sentiments align with a broader shift among Federal Reserve policymakers towards a more dovish stance in recent months. While the likelihood of a rate cut at the upcoming FOMC meeting later this month remains low, his remarks suggest an increased probability of a rate reduction in September.

Recent economic data have shown a moderation in inflation, which had previously surged unexpectedly during the first quarter of 2024. This easing of inflationary pressures has prompted a reevaluation of monetary policy, leading Waller to outline three potential scenarios for the near-term future:

1. Positive Inflation Data: If inflation data continue to show significant improvement, a rate cut may be justified “in the not-too-distant future.” This scenario would indicate a stable economic environment conducive to easing monetary policy.

2. Moderate Data Fluctuations: If economic data exhibit some variability but generally trend towards ongoing moderation of inflation, a cautious approach might be warranted, potentially leading to a rate cut if the trend persists.

3. Higher Inflation: The least likely scenario involves a scenario where inflation unexpectedly rises, necessitating a tighter monetary policy stance by the Federal Reserve to address renewed inflationary pressures.

Waller emphasized that he views the third scenario—unexpectedly stronger inflation—as the least probable outcome. This perspective is supported by recent trends indicating easing inflationary pressures, contributing to his belief that the time for a policy rate reduction is drawing nearer.

Waller’s comments are particularly noteworthy given his historically hawkish position within the FOMC, especially during periods of heightened inflation concerns. In May, Waller had projected that interest rate cuts were “several months away,” pending more definitive evidence of a decline in inflation. His recent remarks suggest that the threshold for a rate cut is approaching.

A key factor influencing Waller’s assessment is the current state of the labor market, which he described as being “in a sweet spot.” This characterization reflects a balance where payrolls are expanding while wage growth is moderating, contributing to a stable economic environment. Additionally, the consumer price index (CPI) recorded a 0.1% decline in June, with the annual core CPI rate at 3.3%, the lowest level since April 2021.

Waller noted that the recent data reflect a steady improvement consistent with the Federal Reserve’s price stability goals. “After disappointing data to begin 2024, we now have a couple of months of data that I view as being more consistent with the steady progress we saw last year in reducing inflation, and also consistent with the FOMC’s price stability goal,” he remarked. This observation suggests that the elevated inflation earlier in the year may have been an anomaly and that the effects of tighter monetary policy are beginning to manifest.

This optimistic outlook is echoed by New York Fed President John Williams, who, in an interview with The Wall Street Journal, observed that inflation data are “all moving in the right direction and doing that pretty consistently.” Williams highlighted that this trend is steering the economy closer to the disinflationary path sought by the Federal Reserve.

Market expectations reflect a growing belief in a more accommodative stance by the Fed. Traders in the fed funds futures market are currently pricing in an initial quarter percentage point rate cut in September, with expectations for at least one additional cut before the end of the year. According to the CME Group’s FedWatch measure, fed funds futures contracts imply a year-end rate of 4.62%, approximately 0.6 percentage points below the current level.

In summary, Governor Christopher Waller’s remarks suggest that the Federal Reserve is approaching a point where a reduction in interest rates may become appropriate, provided that inflation and employment data continue to support such a decision. As the Federal Reserve navigates these economic conditions, both market participants and policymakers will closely monitor evolving data to determine the optimal timing for potential policy adjustments.