Jan 16, 2024 - Economy

Fed official is feeling good about inflation, sees "path" to 2%

Federal Reserve governor Christopher Waller speaks at an event in 2021. Photo: Bess Adler/Bloomberg via Getty Images

Fed governor Christopher Waller is more confident now than at any point since 2021 that "inflation is on a path" to the Fed's 2% target.

What he's saying: "[B]ased on economic activity and the cooling of the labor market, I am becoming more confident that we are within striking distance of achieving a sustainable level of 2 percent" inflation, the influential policymaker said at a Tuesday event hosted by the Brookings Institution.

Why it matters: Waller's comments, delivered virtually due to inclement weather in Washington, D.C., lay out the case for why the Fed can consider cutting interest rates this year. But he was slightly cautious that optimal economic trends may not last.

  • "The data we have received the last few months is allowing the [Fed] to consider cutting the policy rate in 2024," Waller said.
  • "However, concerns about the sustainability of these data trends requires changes in the path of policy to be carefully calibrated and not rushed," Waller noted, adding that the timing and extent of such cuts will depend on incoming economic data.

The big picture: The speech, titled "Almost as Good as it Gets...But Will It Last?" is the closest thing to a soft landing victory lap yet by a top Fed policymaker.

  • Waller notes that economic activity has moderated but not collapsed and the labor market remains healthy as they come back into balance — all while inflation has returned to more tolerable levels.
  • He also notes that financial conditions "remain restrictive and continue to have the desired effect of being a drag on economic activity to put downward pressure on inflation."

Yes, but: Waller notes a number of risks that could make him more pessimistic about inflation's path, including faster-than-expected economic growth in the final quarter of 2023; labor market rebalancing "stops improving or reverses"; and "gains on moderating inflation evaporate."

The intrigue: History shows that the Fed has cut rates "reactively and did so quickly and often by large amounts," Waller said. This economic cycle, however, might prove different.

  • "When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," Waller said.
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