“Congratulations on that… if you can pull it off”

In love, the first cut may be the deepest (as per Rod StewartSheryl Crow, and others). But for the Fed’s Waller, the first cut is to be done “methodically and carefully”. Tacky musical references aside, the Fed Governor explained in his speech earlier this week that “the data we have received the last few months is allowing the Committee to consider cutting the policy rate in 2024”. With inflation seemingly on the right path for reaching the FOMC’s “price-stability goal”, Waller was yet another confirmation of the adjustment cut thesis, explaining in his conclusion, “The healthy state of the economy provides the flexibility to lower the (nominal) policy rate to keep the real policy rate at an appropriate level of tightness.” This was tempered by Waller’s warning during the Q&A that “the worst thing we’d have is it all reverses after we’ve already started to cut” and the admonition for the market to not get too excited: “I will end by repeating that the timing and number of rate cuts will be driven by the incoming data.” Roger. It’s worth noting that Lagarde also echoed this broad sentiment in a recent interview at Davos, where the ECB head said summer rate cuts were “likely” but attempted to keep the horses from bolting with the follow-up that “we are also saying that we are data-dependent and that there is still a level of uncertainty and some indicators that are not anchored at the level where we would like to see them.”

Taking a quick turn around the recent data, Waller and colleagues may not be quite as confident of continuing cooperative economic and inflation data. Sure, the Empire Fed’s latest Manufacturing Survey saw its headline number drop to “its lowest reading since May 2020” as new orders and shipments “also posted sharp declines”. And the ISM Services report made a splash with its December Employment number at a dour 43.3 (though the comments included concerns about “labor constraints”). All of that said, both economic activity and inflation are showing signs of life. December Retail Sales were “the latest sign of a resilient consumer”, this week’s Initial Claims (admittedly seasonally adjusted) were “the lowest level since Sept. 24, 2022”, and while a comparison to the UK comes with a potential list of caveats and counter-arguments a mile long, the last thing Waller and friends would want to see is a repeat of the UK’s inflation data, which “unexpectedly nudged upwards to 4% year-on-year”.


P.S. As a follow up related to the comments we made on the deficit last week, in response to a question about the role of fiscal policy on inflation, Waller argued that while some people have said inflation is “all supply”, increasing “the debt by $6 trillion in a matter of two years… had to have had an impact”.