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A top official at the Federal Reserve has sent his strongest signal to date that further monetary tightening from the US central bank may not be needed given clear signs that the economy is slowing to a degree necessary to bring inflation fully under control.
In prepared remarks delivered on Tuesday, governor Christopher Waller, who had established himself as one of the most hawkish officials on the Federal Open Market Committee, said he was “increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 per cent”.
With consumer spending slowing alongside business activity and labour demand, Waller said overall growth appeared to be moderating “as I had hoped it would, supporting continued progress on inflation”.
In a question-and-answer portion following his speech, Waller said he expected growth in the fourth quarter to moderate significantly to around 1 to 2 per cent from the faster-than-expected 4.9 per cent annualised pace registered between June and September.
The latest comments come in the final days before public communications from the Fed are limited ahead of its last policy meeting of the year.
After 11 consecutive interest rate increases since March 2022, the Fed has since July kept its benchmark interest rate steady at a 22-year high of 5.25 per cent to 5.5 per cent as it seeks to establish whether it needs to restrain the economy further to tackle inflation. The central bank is widely expected to maintain this level at its December gathering.
Despite encouraging signs in the economic data, Waller on Tuesday made clear that it was still too early to say definitively that the Fed was done raising interest rates, given that the labour market remained “fairly tight” with job creation still occurring at a rate that outpaces the amount of available supply.
He said the recent loosening of financial conditions, as long-term US government borrowing costs had fallen in recent weeks, suggested a need for caution.
This dynamic served as “a reminder that many factors can affect these conditions and that policymakers must be careful about relying on such tightening to do our job”, he added.
Michelle Bowman, another Fed governor, emphasised the need for caution, saying in a speech on Tuesday she still thinks it likely that the central bank will need to increase the fed funds rate further to bring inflation down in a “timely way”.
Bowman highlighted several uncertainties potentially keeping inflation higher than expected, including the capacity for supply-side improvements to continue and strength in consumer spending across both goods and services. She also warned that the “neutral rate”, which reflects a level of interest rates that neither stimulates nor depresses the economy, may have in fact risen following the pandemic.
“We should keep in mind the historical lessons and risks associated with prematurely declaring victory in the fight against inflation, including the risk that inflation may settle at a level above our 2 per cent target without further policy tightening.” she said.
Still, the focus has shifted to when the Fed will cut its main interest rate next year — something Waller on Tuesday signalled may be necessary as inflation retreats further to ensure that policy is not getting even more restrictive for households and businesses.
“There’s just no reason to say you would keep [rates] really high and inflation is back at target, for example,” he said.
Fed chair Jay Powell said this month that the central bank was not thinking about rate cuts “now at all”.