Fed Governor Waller says inflation softening faster than he expected put him in half-point-cut camp

Federal Reserve Governor Christopher Waller said Friday he supported a half percentage point rate cut at this week’s meeting because inflation is falling even faster than he had expected.

Citing recent data on consumer and producer prices, Waller told CNBC that the data is showing core inflation, excluding food and energy, in the Fed’s preferred measure is running below 1.8% over the past four months. The Fed targets annual inflation at 2%.

“That is what put me back a bit to say, wow, inflation is softening much faster than I thought it was going to, and that is what put me over the edge to say, look, I think 50 [basis points] is the right thing to do,” Waller said during an interview with CNBC’s Steve Liesman.

Both the consumer and producer price indexes showed increases of 0.2% for the month. On a 12-month basis, the CPI ran at a 2.5% rate.

However, Waller said the more recent data has shown an even stronger trend lower, thus giving the Fed space to ease more as it shifts its focus to supporting the softening labor market.

A week before the Fed meeting, markets were overwhelmingly pricing in a 25 basis point cut.

“The point is, we do have room to move, and that is what the committee is signaling,” he said.

The Fed’s move to cut by half a percentage point, or 50 basis points, brought its key borrowing rate down to a range between 4.75%-5%. Along with the decision, individual officials signaled the likelihood of another half-point in cuts this year, followed by a full percentage point of reductions in 2025.

Waller indicated there are a number of scenarios that could unfold, with each depending on how the economic data runs.

“I was a big advocate of large rate hikes when inflation was moving much, much faster than any of us expected,” he said. “I would feel the same way on the downside to protect our credibility of maintaining a 2% inflation target. 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 to get inflation closer to our target.”

The Fed gets another look at inflation data next week when the Commerce Department releases the August report on the personal consumption expenditures price index, the central bank’s preferred measure. Chair Jerome Powell said Wednesday that the Fed’s economists expect the measure to show inflation running at a 2.2% annual pace. A year ago, it had been at 3.3%.