Fed Speak – Chris Waller supports a 25 bps rate cut in July policy

FOMC MEMBER WALLER VEERS TOWARDS RATE CUT

If one were to read through the recent policy statements and minutes of the Fed meetings, the consensus seems to favour status quo. Nobody knows how the reciprocal tariffs could impact inflation in the US. Speaking at the Money Marketeers of New York University; Governor Chris Waller was categorical that the time was ripe for a rate cut. The Fed had cut rates by 100 bps between September 2024 and December 2024. However, since the start of 2025, the Fed has  held rates in the range of 4.25%-4.50%. Chris Waller is one of the few senior members of the FOMC to openly come out in favour of rate cuts. That has been the bone of contention between Trump and Powell, with the Fed chair not keen on rate cuts.

WHY 25 BPS RATE CUT IN 30-JULY FED MEET?

When the FOMC meets for its July Monetary Policy on 30-July, the big question would be whether the Fed should still worry about inflation expectations. It would depend on the votes, but members like Chris Waller are already favouring a 25 bps rate cut in July meet.

• According to Waller, the impact of higher tariffs will be a one-time impact in terms of increase in price level. Based on current feedback, the rise would be one-time and also relatively small. More importantly, the inflation expectations are still anchored.
• According to Waller, Fed policy must not ignore the fact that recent high frequency data flows have been hinting at pressure on growth and consumer spending. Real GDP growth was just 1% in the first half of 2025 and likely to remain soft in H2-2025.
• Despite the implementation of tariffs on China, the unemployment rate has been soft at 4.1%. With inflation impact being just about 50 bps and possibly another 50 bps if the tariffs are implemented, the focus must shift to boosting growth and consumer spending, rather than obsessing too much about likely inflation levels.
• Due to the above factors, Waller expects that the equilibrium rate of interest would be 3.0%, but actual interest rates are nearly 125 bps above that rate. Hence, it would be prudent to cut rates by 25 bps in July policy and then take data as it comes.
• Waller sees risks to the labour market. While unemployment rate may look comfortable at 4.1%, wage growth has been static. This opens up downside risks to growth. Any rate cut now would boost growth and jobs; and the flat wage growth will restrict inflation.

Waller’s argument is that, with upside risks to inflation limited, Fed policy must not wait until jobs and GDP deteriorate before cutting rates. The time to cut rates is Now.

IS THERE A SUBTLE SLOWDOWN IN US GDP?

The real GDP growth in the first half of 2025 was just 1.0%, compared to 2.8% in the second half of 2024. That is well below estimates of potential growth rate of US economy. Current forecasts suggest that GDP growth in H2-2025 would be below 1.0%. A cut in interest rates would be the best way to trigger a growth recovery in 2026, if not in second half of 2025.

A better way to understand growth slowdown in the US is via real personal consumption expenditures (PCE); which fell sharply from 3.0% last year to 1.0% this year. Weak growth in real disposable income, due to the temporary effects of tariff increases, will put further pressure on consumer spending and GDP growth. After all, private consumption spending accounts for 67%  of US economic activity.

FINAL THOUGHTS ON THE NEED TO CUT FED RATES

According to Waller, the inflation impact is visible, but the good news is that it is likely to, at best, be temporary. The slowdown in personal consumption spending and the tepid wage growth will act as in-built brakes on inflation. Hence, the impact on inflation from tariffs will be one-time; and little beyond that.

The concerns are that growth has already taken a hit and things could just about get worse as consumption declines. Waller believes that the smartest thing to do would be to initiate a series of rate cuts, starting with 25 bps in July. That will keep growth concerns at bay, without disturbing the price stability in the economy.