Chris Waller supports the idea of a rate cut at the upcoming July meeting. He believes tariffs will not cause long-term inflation, viewing them as a one-time event. Waller advised that the Federal Reserve should not wait for a significant drop in the job market before making cuts. While he recognizes the current strength of the job market, he also pointed out the potential for higher unemployment among recent graduates.

The Fed’s Stance on Interest Rates

The Fed has kept interest rates unchanged for six months, expecting inflation to rise, which hasn’t happened. Waller thinks it’s wise to lower rates and observe the inflation results. He stated that even a 10% tariff on all imports would have almost no impact on overall inflation. Waller hints at a more relaxed approach, suggesting that there could be differing opinions within the committee at the upcoming meeting. He commented, “I’m all in favor of saying maybe we should start thinking about cutting the policy rate at the next meeting, because we don’t want to wait till the job market tanks before we start cutting the policy rate.” This indicates a notable change in attitude. Waller seems more open to lowering the federal funds rate, not due to an impending recession, but because inflation is behaving better than expected. After six months of caution, the anticipated price increase has not occurred. Instead, inflation data has surprised positively by remaining low. Waller’s comments suggest a preference for acting before job market weaknesses arise instead of responding after they occur. His view that tariffs will have a limited effect on inflation counters earlier concerns that trade actions would create lasting price increases. This isn’t merely semantics; it affects the Fed’s entire strategy. If the Fed does not need to wait for clear job losses before cutting rates, expectations for future policy could shift significantly.

Concerns about the Job Market

The strength of Waller’s position is based on two key assumptions: first, that inflation is unlikely to rise quickly, and second, that cutting rates now could prevent a steeper downturn later. It’s particularly significant that a rate cut is being considered before any major job market crisis occurs. This indicates that Waller, and perhaps others, trust the current decrease in inflation more than they fear a sudden increase. The future path of policy depends heavily on whether this view is shared among voting members. If it is, the rates market may have to adjust its expectations for rate cuts as soon as July. This adjustment won’t happen alone. Eurodollar and SOFR futures, already leaning toward cuts later this year, will need to not only adjust nominal changes but also revise volatility expectations and forward rate spreads. We should note Waller’s concern regarding higher unemployment for recent graduates. While not an immediate policy driver, it suggests a broader issue about generational challenges in the job market. This is often overlooked in mainstream data but could be a growing concern for the Fed. The struggles of one group can sometimes indicate a wider economic weakness, so these signs should not be ignored. What should we take away from this? Keep an eye on positions that expect rates to remain steady over the summer; if more voices support Waller’s view, volatility will shift, and changes may happen sooner than many think. Traders who expect the Fed to wait for further job market issues may find themselves misaligned. In short, the current risk distribution around policy expectations is shifting. It’s also important to note that market reactions in the fixed income volatility area, especially at the short end, could be sensitive to this change in sentiment. There’s a clear difference between a central bank responding to weak data and one that proactively addresses anticipated issues. This influences how we perceive upcoming policy signals from the committee. In summary, we’ve transitioned from a period where rate cuts depended on conditions to one where they may be warranted without hesitation. Whether this change occurs in July or September is now a very relevant and tradable question. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now