Federal Reserve Governor Christopher Waller said on Friday he supports a half-percentage-point interest rate cut at this week's meeting because inflation is falling faster than he expected.
Core inflation, excluding food and energy, the Fed’s preferred measure, has been running below 1.8% for the past four months, Waller told CNBC, citing recent consumer and producer price data. The Fed targets an annual inflation rate of 2%.
“That's what made me step back a little bit and say, 'Oh my God, inflation is coming down a lot faster than I thought,' and that's what made me say, 'Look, I think 50 (basis points) is the right thing to do,'” Waller said in an interview with CNBC's Steve Liesman.
The consumer and producer price indices showed a rise of 0.2% during the month. On an annual basis, the consumer price index growth rate was 2.5%.
However, Waller said the latest data showed a stronger downward trend, giving the Fed room to ease monetary policy further as it shifts its focus to supporting the sagging labor market.
A week before the Fed meeting, markets were widely expecting a 25 basis point rate cut. A basis point is equal to 0.01%.
“The point is that we have room to move, and that's what the committee is pointing to,” he said.
The Fed’s decision to cut interest rates by half a percentage point, or 50 basis points, brought its benchmark interest rate down to a range of 4.75% to 5%. Along with the decision, individual officials have indicated the possibility of another half-point rate cut this year, followed by a full percentage point of cuts in 2025.
Fed Governor Michelle Bowman was the only member of the Federal Open Market Committee to vote against the cut, instead favoring a smaller quarter-point cut. She issued a statement Friday explaining her opposition, which was the first “no” vote by a Fed governor since 2005.
“While it is important to recognize that there has been significant progress in reducing inflation, with core inflation remaining around or above 2.5 percent, I see a risk that the Committee’s broader policy action could be interpreted as a premature declaration of victory on the price stability mandate,” Bowman said.
Regarding the future path of prices, Waller noted that there are a number of scenarios that could unfold, each of which depends on how economic data plays out.
Futures market prices shifted after Waller spoke, with traders now pricing in 50-50 odds for another half-percentage-point cut at the Nov. 6-7 meeting, according to CME Group's FedWatch program.
“I have been a strong advocate of aggressive rate hikes when inflation has been moving much faster than we expected,” he said. “I would feel the same way on the downside to protect our credibility in maintaining our 2 percent inflation target. If data starts to look weak and continues to look weak, I would be more willing to take a more aggressive stance on cutting rates to bring inflation closer to our target.”
The Federal Reserve is set to take another look at inflation data next week when the Commerce Department releases its August report on the personal consumption expenditures price index, the central bank’s preferred measure. Fed Chairman Jerome Powell said Wednesday that Fed economists expect the measure to show inflation at an annual rate of 2.2%. It was 3.3% a year ago.
