Top Federal Reserve official would back more aggressive interest rate cuts if US data worsen

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A top Federal Reserve official has said he would support more aggressive interest rate cuts from the US central bank if the economic data deteriorates further, as he cautioned inflation is falling much faster than expected.

“If the data starts coming in soft and continues to come in soft, I would be much more willing to be aggressive on rate cuts,” Christopher Waller, one of the Fed’s governors, said in an interview with CNBC on Friday.

He added that if the data come in “fine” then he could see scope for the Fed to downshift to a quarter-point cut at the next meeting in November, a day after the November 5 US presidential election.

The comments from Waller, a leading voice on the Federal Open Market Committee, came two days after the central bank kicked off its first easing cycle in more than four years with a larger than usual half-point interest rate cut, which took the Fed’s benchmark rate to 4.75 per cent to 5 per cent.

His interventions underscore the Fed’s commitment to staving off a recession in the aftermath of the worst inflation shock in decades — a huge feat that many thought impossible at the onset of the crisis.

Fed chair Jay Powell on Wednesday said the larger than usual move was aimed at maintaining the strength of the US economy — not a response to the kind of crisis that necessitated bumper cuts in the past.

Waller on Friday echoed that sentiment, saying that in a “solid” labour market, the Fed was not “behind” in terms of offering relief to borrowers.

Waller was among officials who voted for the half-point rate cut, though his colleague Michelle Bowman dissented — the first time since 2005 that a governor has opposed a Fed rate decision.

Bowman on Friday explained her preference for a quarter-point cut, saying a “measured” pace would “avoid unnecessarily stoking demand”.

“I see the risk that the committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate,” she said, adding inflation remains above the Fed’s 2 per cent target and the economy is “strong”.

Waller said that recent data suggested inflation was “softening much faster than I thought it was going to” put him “over the edge to say, ‘look, I think 50 [basis points] is the right thing to do’.”

Waller had said before the quiet period ahead of this week’s Fed meeting that he was “open-minded” about the possibility of a larger cut, even as he suggested it hinged on there being further economic weakness.

Powell on Wednesday framed the cut as a “recalibration” of the Fed’s monetary policy settings given the downdraft in inflation and softening of the labour market.

Most officials project the central bank will make another half a percentage point worth of cuts over the two remaining meetings of the year.

Powell on Wednesday stressed the half-point cut should not be considered the Fed’s “new pace”, suggesting the central bank is likely to opt for a quarter-point reduction.

There is significant dispersion across officials’ estimates for rates this year and in 2025, when most officials forecast the policy rate will drop to 3.25 per cent to 3.5 per cent. Officials’ wide range of estimates suggest forthcoming meetings will like this past one will be a close call.

“We do have room to move, and that is what the committee is signalling through 2025,” Waller said.