- Key insight: Federal Reserve Gov. Christopher Waller said Friday that he supports eliminating language in the Federal Open Market Committee's forward guidance that implies that the central bank is inclined to cut rates, joining three dissents from regional Fed presidents during the last FOMC meeting.
- Expert quote: "You just can't look at this data and say, 'Oh yeah, we could cut rates here by September' or something. You can't be serious as a central banker and talk about that." — Federal Reserve Gov. Christopher Waller
- Forward Look: Waller's comments come as President Trump is poised to swear in Kevin Warsh as the next Fed chair Friday, the culmination of a monthslong effort to exert pressure on the central bank to lower interest rates dramatically.
Another Federal Reserve official has come out against the central bank's so-called "easing bias" in the face of rising inflation.
In a Friday morning speech, Fed Gov. Christopher Waller said the Federal Open Market Committee should hold its policy rate steady until
Until then, Waller said, the Fed should stand just as ready to raise rates as it is to lower them.
"Inflation is not headed in the right direction," Waller said, pointing to higher energy and commodity costs since the U.S. and Israel first attacked Iran in late February. "Based on this recent data, I would support removing the 'easing bias' language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase."
Waller joins Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari and Dallas Fed President Lori Logan in calling for the FOMC to adopt a neutral stance toward monetary policy. The three reserve bank leaders all voted against the policy statement issued by the committee following its
Waller was an early advocate for lowering interest rates. Last year, he made the case that the Fed should ease policy to support what he believed to be a shaky labor market. His push for cuts came at a time when many economists and policymakers were warning about the inflationary impact of President Donald Trump's sweeping tariff rollout — concerns Waller suggested would be a one-time event. Speaking Friday morning at the Centre for Central Banking in Frankfurt, Germany, he said that appears to have been "the right call."
Today, Waller said, the labor market and overall economy appear to be strong and would need to deteriorate significantly to necessitate an easing of monetary policy. As for inflation, he said, he is less confident about the transitory nature of the current run up in prices than he was during the tariff rollout.
"I've been in favor of the easing bias for a long time, but the last couple of labor market reports and inflation reports just turned me the other way," Waller said during a question and answer portion of Friday's event. "You just can't look at this data and say, 'Oh yeah, we could cut rates here by September' or something. … You can't be serious as a central banker and talk about that."
Specifically, Waller said he is concerned that a second jump in prices on the heels of the tariff shock could erode consumer confidence in prices returning to the Fed's target growth rate of 2%. Recent surveys suggest this has not happened on a large scale yet, Waller said, there is some evidence that people are anticipating more inflation in the short- to medium-term. He said he will be watching to see if this sentiment shows up in futures markets.
"While the stability so far of longer-term inflation expectations is encouraging, I can't be sure it is the end of the story," Waller said in his prepared remarks. "As we saw in the pandemic, a series of what seem to be transitory shocks can lead to persistent inflation and an unanchoring of inflation expectations."
Later in the event, Waller downplayed the significance of the multiple dissenting votes during the last meeting. While unusual for the Fed — which he said has a strong "culture of consensus" — dissents are common within other central banking bodies around the world, Waller said, adding that the three reserve bank presidents who dissented last month supported the committee's ultimately policy decision to keep the federal funds rate unchanged.
"Sometimes a vote is over a couple of different things and people kind of forget that," Waller said. "There's a bunch of stuff in that statement we all have to agree on and sometimes you say, 'I just don't like that one thing.'"
No way back on balance sheet
During the audience question portion of Friday's event, Waller also addressed incoming Fed Chair Kevin Warsh's long-stated
Waller said it is possible to reduce the Fed's $6.7 trillion of assets, but not by much because of the nature of its outstanding liabilities. He estimates that the balance sheet could be reduced by $300 billion to $500 billion — a significant reduction, but not one that would turn back the clock to the pre-pandemic level of around $4 trillion, much less the pre-2008 levels of under $1 trillion.
"There's no way you can go back to the small balance sheet that we had in 2008. We have $2.3 trillion or $2.4 trillion of just currency outstanding. That's three times the size of what our balance sheet was in 2008," Waller said. "Then you add the Treasury's checking account on there, which is about $800 billion to $900 billion. Just those two things put you at over $3 trillion."
Waller said he has not had a policy discussion with Warsh yet. Even so, Waller said Warsh's goal of a "qualitative" reduction in the balance sheet is achievable, though he warned it should not be done in a way that significantly reduces the amount of reserves available to the banking system.
"I strongly believe we do not want to go back to a scarce reserves world," Waller said. "But, if you could lower demand for reserves by the banks in terms of how much liquidity they would want to hold … you could decrease the supply and still have ample reserves. We're looking into that. We'll see what it is."
