Federal Reserve Governor Christopher Waller said late Thursday that he continues to believe that the Fed should cut its interest rate target at the July meeting, citing mounting economic risks and the strong likelihood that tariff-induced inflation will not drive a persistent rise in price pressures, per Reuters.
Key quotes
The Fed should cut interest rates 25 basis points at July meeting.
Rising risks to economy favour easing policy rate.
If underlying inflation remains in check and growth tepid, more cuts needed.
The Fed should not wait until labour market hits trouble before cutting rates.
Delaying cuts runs risk of need for more aggressive action later.
Evidence mounting that labour market is growing weaker.
Tariffs likely to have one-time impact the Fed can look through.
July rate cut could give the Fed space to hold rates for a few meetings.
Absent tariff impact, inflation is close to the Fed’s 2% target.
Tariffs will boost inflation in the near term.
Risks include an economic slowdown with GDP around 1%.
Economy calls for monetary policy closer to neutral setting.
Expects tariff impact to fade next year.
Data suggests job market ‘on the edge.’
Upside risks to inflation are limited.
Sustained 10% tariff likely to increase inflation 0.75%–1% this year.
Private sector hiring ‘near stall speed.’
Market reaction
At the time of writing, the US Dollar Index (DXY) is trading 0.14% lower on the day to trade at 98.52.
Fed FAQs
Monetary policy in the US is shaped by the Federal Reserve (Fed). The Fed has two mandates: to achieve price stability and foster full employment. Its primary tool to achieve these goals is by adjusting interest rates.
When prices are rising too quickly and inflation is above the Fed’s 2% target, it raises interest rates, increasing borrowing costs throughout the economy. This results in a stronger US Dollar (USD) as it makes the US a more attractive place for international investors to park their money.
When inflation falls below 2% or the Unemployment Rate is too high, the Fed may lower interest rates to encourage borrowing, which weighs on the Greenback.
The Federal Reserve (Fed) holds eight policy meetings a year, where the Federal Open Market Committee (FOMC) assesses economic conditions and makes monetary policy decisions.
The FOMC is attended by twelve Fed officials – the seven members of the Board of Governors, the president of the Federal Reserve Bank of New York, and four of the remaining eleven regional Reserve Bank presidents, who serve one-year terms on a rotating basis.
In extreme situations, the Federal Reserve may resort to a policy named Quantitative Easing (QE). QE is the process by which the Fed substantially increases the flow of credit in a stuck financial system.
It is a non-standard policy measure used during crises or when inflation is extremely low. It was the Fed’s weapon of choice during the Great Financial Crisis in 2008. It involves the Fed printing more Dollars and using them to buy high grade bonds from financial institutions. QE usually weakens the US Dollar.
Quantitative tightening (QT) is the reverse process of QE, whereby the Federal Reserve stops buying bonds from financial institutions and does not reinvest the principal from the bonds it holds maturing, to purchase new bonds. It is usually positive for the value of the US Dollar.
