Fed Governor Waller urges caution for now, says rate cuts possible later in the year

• Waller stated he would 'start advocating again for cutting the policy rate later this year' if the labor market continues to weaken, after dissenting in January for a rate cut but supporting a pause this week
• The labor market showed nearly zero net job growth in 2025, with four out of five recent reports showing declines, though unemployment remains unchanged due to a stagnant labor force
• Fed Governor Michelle Bowman expects three rate cuts in 2026, putting her among just three of 19 policymakers who see aggressive cuts this year according to the Fed's dot plot

Summary

Key Development: Federal Reserve Governor Christopher Waller shifted to a more cautious stance on interest rate policy while keeping the door open for potential cuts later in 2025, citing labor market weakness and geopolitical uncertainty.

Policy Outlook:

• Waller, previously a rate-cut advocate who dissented in January, now supports pausing cuts in the near term
• He stated rate cuts remain possible later this year if the labor market continues weakening and inflation behaves
• Markets have largely priced out rate cuts through 2026 and into 2027, reversing earlier expectations of 2-3 cuts in 2025

Labor Market Concerns:

• Nearly zero net job growth in 2025, with four out of five recent reports showing negative job creation
• Unemployment rate remains unchanged despite weak job growth as labor force participation is also flat
• Another decline of 90,000 jobs would signal serious labor market deterioration requiring policy response

Inflation Dynamics:

• Waller views current inflation pressures as one-off tariff effects, with underlying trend toward the Fed's 2% target
• Concerns persist if tariff effects don't fade by second half of 2025 and inflation continues rising
• Ongoing Iran war adds uncertainty to economic outlook

Additional Context:

• Fed Governor Michelle Bowman (also Trump-nominated) expects three rate cuts this year, taking rates below neutral
• Only 3 of 19 Fed policymakers in the latest "dot plot" anticipate aggressive cuts this year
• Fed's benchmark rate decisions face tension between recession risks and inflation concerns