One of the most influential officials at the Federal Reserve, Waller: If appropriate, will advocate for preemptive rate cuts

One of the most influential officials of the Federal Reserve, Governor Waller, recently mentioned the possibility of a "preemptive" rate cut. He explicitly stated his support for the Fed to cut interest rates at the September FOMC meeting, emphasizing that a slowing labor market is important.

On Friday, Federal Reserve Governor Waller stated that recent data necessitates action from the Fed, emphasizing the importance of starting rate cuts at the next FOMC meeting:

"Given the continued progress in inflation and the cooling labor market, I believe it is time to lower the federal funds rate target range at the upcoming Fed meeting."

Waller did not specify how much he believes the Fed should cut rates or the frequency of rate cuts. He mentioned that determining the pace of rate cuts and the overall downward adjustment of the policy rate will be decisions to be made in the future.

Although not explicitly stated, Waller's remarks were dovish. He mentioned that as inflation improves towards the Fed's 2% target, he is willing to accept the Fed may need to take aggressive measures to sustain the labor market:

If appropriate, I will advocate for a "preemptive" rate cut and remain open to the magnitude and pace of rate cuts.

If data suggests the need for a larger rate cut, then I will also support it. If the U.S. labor market deteriorates faster than expected, the Fed should take more significant rate cut measures, increasing the likelihood of achieving a soft landing.

Furthermore, I do not believe this first rate cut will be the last. As inflation and employment approach our long-term targets, and the labor market slows, a series of rate cuts may be appropriate.

Regarding the labor market, which the market is highly concerned about, Waller pointed out that the U.S. job market continues to soften but has not deteriorated. The unemployment rate has risen, mainly due to an increase in labor supply. The risks facing employment are more prominent compared to inflation issues.

Before Waller's speech on Friday, the U.S. Bureau of Labor Statistics released the highly anticipated August non-farm payroll data, with a mixed overall report:

The U.S. added 142,000 non-farm jobs in August, below the expected 165,000. July's data was revised significantly downward from 114,000 to 89,000, and June's data was revised down by 61,000.

The unemployment rate decreased from 4.3% in July to 4.2% in August, meeting expectations. This marks the first decline in the unemployment rate since March this year.

Average hourly earnings rose by 3.8% year-on-year in August, slightly higher than the expected 3.7% and the previous value of 3.6%; hourly earnings rose by 0.4% month-on-month, with expectations and the previous value at 0.3% and 0.2% respectively.

Regarding inflation, Waller believes that the U.S. is on track to reach the Fed's 2% inflation target.

Waller also stated that the U.S. economy is neither in a recession nor expected to head towards one.

Media analysis points out that while other Fed policymakers have recently advocated for easing monetary policy as soon as possible, Waller's stance is the clearest signal. Waller reiterated the language used by Fed Chair Powell at the end of August - that the "time is right" to adjust monetary policy.

After Waller's dovish remarks, traders increased their bets on the Fed's easing prospects. The yield on the U.S. 10-year Treasury note briefly declined, hitting a daily low of 3.6443% during Waller's speech, with an overall drop of 8.26 basis points intraday, moving away from the daily high of 3.7589% reached after the non-farm payroll report was released and the initial rebound in U.S. stocks US stocks narrowed their losses in the short term.

Analysis by "New Fed Communication Agency"

Although the initial market reaction to Powell's latest speech was dovish, well-known financial journalist Nick Timiraos, also known as the "New Fed Communication Agency," dampened the market's overly optimistic expectations. He pointed out:

Fed Governor Powell's speech did not explicitly mention 25 or 50 basis points. He tends to support an initial 25 basis point rate cut, clearly leaving the option to accelerate rate cuts when new data shows further deterioration.

Timiraos said that Powell praised the Fed for not overreacting to the banking crisis, lower inflation data in the second half of 2023, and higher inflation data in the first quarter of 2024. He then said, "Based on the evidence I've seen, I don't believe the economy is in a recession or heading towards one."

Timiraos noted these "if" statements in Powell's speech:

If the data shows the need for a larger rate cut, then I would also support it. When inflation accelerates in 2022, I am a firm supporter of preemptive rate hikes, and if appropriate, I would also support preemptive rate cuts.

These decisions will be determined by new data.

I expect these rate cuts to proceed cautiously as the economy and employment continue to grow, but in the context of stable inflation, I am ready to support the economy as needed and take swift action.

Timiraos interpreted that the so-called new data probably does not include today's data.

After Timiraos's interpretation, US stocks fell again, with the decline widening thereafter. On Friday, a variety of assets experienced a general decline, with US stocks plummeting:

Expectations for rate cuts in the market also retreated: