US Fed governor says bold rate cut not signal of ‘falling behind’

AFP | Washington, United States

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The Federal Reserve’s big interest rate cut this week is not a sign that the US economy is “falling behind,” Fed governor Christopher Waller said in an interview on Friday.

“It’s not about reacting to, or falling behind or anything like that,” he told CNBC. “I do not believe we’re behind.”

Waller was responding to arguments that the central bank should not do a half percentage point rate cut -- instead opting for a smaller reduction -- as this would be a sign of economic weakness.

Citing a speech he made earlier this year, Waller stressed that the Fed could cut rates even if the economy was doing fine.

“And that’s the position we’re in,” he said, noting that inflation is cooling while the labor market remains solid.

The Fed cut its key lending rate by half a percentage point this week, marking its first reduction for more than four years. The move sharply lowers borrowing costs in a bid to boost the economy.

Waller told CNBC that policymakers still have much room to lower rates over the next six to 12 months.

The pace of reductions in turn would be determined by incoming data, for example on the jobs market and inflation, he said.

Separately, a paper that Waller co-authored, published Friday, suggested that the US economy is not out of the woods yet and could still see a rise in unemployment.

“The labor market is not fully back to where it was prior to the pandemic, and inflation remains significantly” above the Fed’s long-term inflation target of two percent, wrote Waller and Andrew Figura, a senior economist at the bank. “As a result, it is possible that a soft landing will not occur,” they added.

This refers to a scenario where inflation eases to target with only a “noticeably smaller increase in unemployment than has occurred in previous recessions.”

But despite this warning, Waller and Figura said most forecasters still expected a soft landing, with only a “modest” rise in the unemployment rate.

“Clearly, they also believe that a soft landing in the labor market is possible,” they added.