A Fed Governor Reiterates That Rate Cuts Are Coming

A prominent Federal Reserve official on Tuesday laid out a case for lowering interest rates methodically at some point this year as the economy comes into balance and inflation cools — although he acknowledged that the timing of those cuts remained uncertain.

Christopher Waller, one of the Fed’s seven Washington-based officials and one of the 12 policymakers who gets to vote at its meetings, said during a speech at the Brookings Institution on Tuesday that he saw a case for cutting interest rates in 2024.

“The data we have received the last few months is allowing the committee to consider cutting the policy rate in 2024,” Mr. Waller said. While noting that risks of higher inflation remain, he said “I am feeling more confident that the economy can continue along its current trajectory.”

Mr. Waller suggested that the Fed should lower interest rates as inflation falls. Because interest rates do not incorporate price changes, otherwise so-called real rates that are adjusted for inflation would otherwise be climbing as inflation came down, thus weighing on the economy more and more heavily.

“The healthy state of the economy provides the flexibility to lower” the policy rate “to keep the real policy rate at an appropriate level of tightness,” Mr. Waller said in his speech.

The Fed governor added that when the policy rate is cut, “it can and should be lowered methodically and carefully.”

America’s central bankers are contemplating their next policy steps after two years of battling high inflation. Officials raised borrowing costs from near-zero in March 2022 to a range of 5.25 to 5.5 percent as of this summer. But now, inflation is fading steadily, and central bankers are beginning to contemplate when and how much they can lower rates.

While officials want to make sure they fully stamp out rapid inflation, they also want to avoid squeezing the economy so much with higher borrowing costs that they cause a painful recession.

Investors have begun to pencil in a good chance of rate cuts as soon as March, though some economists have warned — and officials have hinted — that they may be seeing an imminent move as too sure of a bet.

“March is probably too early in my estimation for a rate decline,” Loretta Mester, the president of the Federal Reserve Bank of Cleveland, said in a recent interview with Bloomberg Television.

When Mr. Waller was asked on Tuesday whether he would rather err on the side of waiting too long than cutting so soon, he said that “in the grand scheme of things, whether it’s six weeks later — it’s kind of hard to believe that’s going to have a huge impact on the state of the economy.”

Mr. Waller said that while his view of the policy outlook was “consistent” with the Fed’s December projection that they would cut interest rates three times this year, “the timing of cuts and the actual number of cuts in 2024 will depend on the incoming data.”

He said that the timing of the first rate cut would be up to the Fed’s policy-setting committee.

Officials want to see evidence that the progress is continuing, he said, “and I believe it will, but we have to see that before we start making decisions,” he said.

Mr. Waller suggested that he would keep an especially close eye on revisions to inflation data set for release in early February.

“My hope is that the revisions confirm the progress we have seen, but good policy is based on data and not hope,” he said.