Fed's Waller: December Cut Appropriate, But January Action More Uncertain

The job market is weak enough to warrant another quarter-point rate cut in December, though action beyond that depends on an upcoming flood of data delayed by the government shutdown, Fed Governor Christopher Waller said on Monday.

Since the last Fed meeting, "most of the private sector and anecdotal data that we've gotten is that nothing has really changed. The labor market is soft. It's continuing to weaken," with inflation expected to ease, Waller said on Fox Business' Mornings with Maria.

While that makes a December cut appropriate, "January could be a little trickier, because we're going to get a flood of data that's released. If it is kind of consistent with what we've seen, then you can make the case for January. But if it suddenly shows a rebound in inflation or jobs or the economy's taking off, then it might give concern" about more cuts, Waller said.

Fed officials are divided over whether to cut rates again at the December meeting, though recent comments from top policymakers - including New York Fed President John Williams on Friday - have shifted market expectations strongly in favor of another quarter-point reduction at their December 9-10 meeting. According to CME Group's FedWatch tool, the futures-market-implied probability of a quarter point reduction to a range of 3.50% to 3.75% is now about 83%, roughly double what it had been a week ago.

The Fed will remain information-constrained at that session, with government statistical agencies still digging through the backlog of work from the 43-day shutdown that ended November 14. The Bureau of Labor Statistics already has said it will not release a jobs or consumer inflation report for October, while the reports for November will not become public until after the Fed meets.

In the absence of those keystone data releases, officials are relying more heavily on information from private providers and on their own contacts in businesses and households around the country. Much of that information is compiled into a compendium known as the Beige Book that is released two weeks prior to each Fed meeting, with the next version due out on Wednesday.

"The labor market is still weak and ... we're getting no evidence telling me it's rebounding," Waller said. He downplayed the recently released September jobs report, showing the economy added a more-than-expected 119,000 jobs that month, as likely to be revised lower. The September report also showed the unemployment rate rose to 4.4% from 4.3% the month before.

One other policymaker joined Waller in voicing that concern on Monday. San Francisco Fed President Mary Daly, who had been on the fence over whether to support a third consecutive rate cut next month, told the Wall Street Journal she now backs a reduction.

"On the labor market, I don't feel as confident we can get ahead of it," she said in an interview Monday. "It's vulnerable enough now that the risk is it'll have a nonlinear change."

Daly, who does not have a vote on policy this year but like all Fed policymakers has a voice at the debate during meetings, now views an inflation surge as a lower risk.

By the time of the next meeting on January 27-28, however, Waller, Daly and their colleagues should be able to better gauge which of two views of the economy are starting to materialize - the one where inflation stays persistent with a risk of moving higher, a possibility that has led several regional reserve bank presidents to oppose further rate cuts, or the one where job growth remains weak and the unemployment rate increases, the outcome Waller finds most concerning.

Fed officials at the upcoming meeting will issue new economic projections that could reset expectations for any rate reductions next year. Policymakers were divided on the outlook in September, with the median official seeing only one further rate hike in 2026. Investors currently anticipate two to three cuts next year, according to data from the CME Group's FedWatch.

By the next meeting, the Fed should have in hand official estimates for jobs, the unemployment rate, and inflation through December.

"You may see a more of a meeting-by-meeting approach once you get to January," Waller said. "But I still don't think the labor market is going to turn around in the next six to eight weeks."

Source: TradingView