- Time for cut in rates is getting closer based on analysis of potential scenarios
- Optimistic scenario is more good inflation and data, which could mean interest rate cut in not too distant future.
- Second and probably more likely scenario is uneven inflation data ahead that still shows progress, that would make a rate cut in near future more uncertain.
- Third scenario, but with low probability, is significant resurgence in inflation in second half of the year.
- US central bank is getting closer to time when cut in policy rate is warranted.
- Current data is consistent with a soft landing, and even less of a trade-off in terms of unemployment.
- Recent inflation data making him more confident Fed will achieve inflation goal.
- On monthly personal consumption expenditures inflation (PCE), need to see a bit more evidence that this will be sustained.
- Moderate consumption growth may continue in second half of the year because personal income data is holding up.
- Labor supply and demand have finally come into rough balance.
- Right now he sees more upside risk to unemployment than has been seen for a long time.
- Wage growth has continued to slow and now consistent with rate needed to support inflation running at 2% in sustained way
Although Waller says the most likely scenario is uneven inflation data ahead, but that is enough to tilt him toward a cut at some point. This is consistent with a September cut view.
The Fed next meets on July 30-31. PCE data will be released on Friday, July 26, but is not expected to be low enough given the mixed CPI and PPI data already released (CPI was weaker but PPI was stronger). The September meeting is on September 17/18th. By that time, there will be the two employment reports, two CPI and PPI reports, and two PCE reports.
Don't underestimate the impact of the unemployment rate. If it starts to run higher, that will be problematic for a soft landing. Layoffs beget more layoffs as companies - and those that lead them - don't want to be the last to react to a slowing economy. The same is true going the other way (i.e. when employment moves higher/unemployment lower).
WSJ Timiraos weighs in:
