The most well-known dovish member of the U.S. central bank said Thursday that he was not in a rush to lower rates, making a rate decrease at the Federal Reserve’s May or June meeting seem less likely.
Fed Governor Christopher Waller stated in a Bloomberg Television interview that it is doubtful that President Donald Trump’s tariff policies will significantly affect the economy until after July 1.
Thus, Waller said, it will be “way into the second half of the year” before the Fed has a better understanding of the effects of the tariffs on slower growth and higher inflation.
Waller shares this opinion with most Fed officials, including Chair Jerome Powell, who have argued for maintaining rates at their current level for a long time.
In an email, Matthew Luzzetti, chief U.S. economist at Deutsche Bank, stated, “The fact that this timeline is being supported by an official who has leaned dovish on the inflation implications of tariffs suggests the broader [Federal Open Market Committee] is also not in a hurry to rush towards rate cuts this summer.”
Any “pre-emptive move” similar to the ones the Fed designed in 2019 has been opposed by Fed speakers. On the basis of a prediction of economic weakness, the Fed loosened policy that year.
Beth Hammack, the president of the Cleveland Fed, stated earlier Thursday that May would be “too soon” for a decrease.
“I believe we must exercise patience. In a CNBC interview, she stated, “I believe that now is a better time to make sure we’re heading in the right direction than to move too quickly in the wrong direction.”
However, if there was “clear and convincing evidence” of what needed to be done, she left the possibility of a move in June or July open. The markets took notice of that comment.
The U.S. labor market would have to worsen quickly, according to Tim Duy, chief economist at SGH Macro Advisors, in order to allay inflation fears and pressure the Fed to lower interest rates.
The FOMC meeting in June is preceded by just two job reports.
“That alone sets a high bar for June, as the Fed typically doesn’t shift policy on the basis of just one or two reports, and the bar is even higher considering that the April employment report is not likely to be excessively weak,” Duy wrote in a client note.
“As was the case last year, September seems more likely” to be curtailed, he stated.
According to Diane Swonk, chief economist at KPMG, a Fed cut is not likely until October.
“I think the Fed is starting to sing in unison, until they know the full effect of the tariffs on the economy, they can’t move,” she stated.
The financial markets are still hoping for cuts sooner rather than later.
Derivative market traders believe there is very little possibility of a rate drop during the Fed’s May 6-7 meeting. Additionally, the likelihood that the Fed will remain unchanged in June has increased to more than 40%.
With the exception of the duties on China, Trump paused all of his proposed reciprocal penalties for three months, ending on July 8. Currently, a 10% universal import tax still applies to goods from the majority of nations.
CEOs of businesses believe they will pass on a third of those higher prices to customers, according to Waller.
“That’s not a big price hit to consumers, if that’s all they pass through,” Waller stated during the interview.
He stated that there will likely be some weakness in the economic data in the upcoming months, but nothing “dramatic” until the White House has made a final tariff decision.
Many Fed watchers believe Waller, who was appointed by Trump to the U.S. central bank, is trying out to be the next Fed chair when Powell’s tenure as head of the central bank expires in May.
On social media, Trump has been criticizing Powell and calling for an immediate rate cut. When the president announced on Tuesday that he had no plans to remove Powell, markets sighed with relief.
