The Federal Reserve’s Waller is recommending that the US move interest rates towards a more neutral level. He prefers a 25 basis point cut at the upcoming September meeting and expects more cuts in the next three to six months.

Waller’s Thoughts on the Current Policy Rate

Waller considers the current policy rate to be somewhat restrictive, roughly 1.25 to 1.50 percentage points above neutral. He sees no need for a larger cut in September unless the August jobs report shows significant weakness, and he notes that inflation is still manageable. Waller aimed for a rate cut in July and feels even more strongly about it now due to weakening labor demand. He is worried about rising risks in the labor market. The next Federal Reserve meeting is set for September 16 and 17. A rate cut is expected, even with high inflation. After recent updates to labor force data from the Non-Farm Payroll report, expectations for a rate cut have increased. Currently, inflation, aside from temporary tariff effects, is around 2%. With Fed Governor Waller openly supporting a rate cut, the September meeting seems well-prepared for this decision. His comments indicate that the central bank wants to shift towards easier monetary policy, aiming for a more neutral stance before the economy weakens further.

Latest Jobless Claims Data

Recent data supports this shift. The weekly jobless claims report from August 28th showed a rise to 310,000, the highest number this year. This reinforces Waller’s concerns about increasing risks to the labor market, which will be a focus leading into the next jobs report. For traders, this strengthens predictions for lower rates, making SOFR futures for September and December appealing. As Waller expects more cuts in the coming months, we are also looking at contracts for early 2026. This approach is focused on preparing for several cuts, not just one in September. The options market also indicates increased activity ahead. With a rate cut nearly confirmed, the main question is how quickly future cuts will occur and how the economy will respond. We’re seeing more interest in purchasing options on interest rate-sensitive ETFs to benefit from the expected rise in market volatility around upcoming Fed meetings and economic data releases. This situation is similar to past easing cycles, such as the Fed’s changes in 2019 after tightening for some time. History shows that once the Fed starts cutting rates, it often continues for several months until economic data stabilizes. We anticipate a similar trend, especially following the aggressive rate hikes from 2022-2024. That said, inflation remains a concern. The latest core PCE report for July indicated a 2.6% year-over-year increase, which is still above the Fed’s 2% target. This presents a risk that the central bank might need to proceed more cautiously than Waller suggests. A notably strong inflation report could easily disrupt these dovish expectations. Create your live VT Markets account and start trading now.

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