Federal Reserve Governor Christopher Waller said recent economic data support keeping interest rates on hold, but if inflation behaves as it did in 2024, policymakers can get back to cutting “at some point this year.”
“If this wintertime lull in progress is temporary, as it was last year, then further policy easing will be appropriate,” Waller said in remarks he’s scheduled to deliver on Tuesday in Sydney. “But until that is clear, I favour holding the policy rate steady.”
The Fed lowered rates by a percentage point in the closing months of 2024 before leaving them unchanged at their January policy meeting. That decision looked sound when new data showed the consumer price index rose 0.5% in January, the most since August 2023.
Waller called the figures out last week “mildly disappointing,” but emphasized that forecasts for the Fed’s favoured gauge of inflation — the personal consumption expenditures price index — were less alarming.
He cited estimates that core PCE, which excludes food and energy, likely rose about 0.25% in January, and 2.6% from a year earlier.
Waller also joined a fellow Fed official in expressing scepticism over whether the CPI figures were properly adjusted for seasonal factors.
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“There seems to be some pattern over the past few years of higher inflation readings at the start of the year,” Waller said. “This pattern brings into question whether the inflation data have ‘residual seasonality,’ which means that statisticians have not fully corrected for some apparent seasonal fluctuations in some prices.”
The Bureau of Labor Statistics seeks to remove the effect of certain seasonal factors — like recurring patterns in climate, production or price-hike cycles — from the data to allow for meaningful month-to-month inflation comparisons.
Philadelphia Fed President Patrick Harker raised similar concerns on Monday.
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“In the last decade, CPI inflation in January has surprised on the upside 9 out of 10 times,” Harker said. “My conjecture is that seasonal adjustments are struggling to keep up with a fast-changing economy, and we need to parse the underlying trends from the month-to-month noise.”
Waller said he’d monitor the data before deciding whether residual seasonality or “a different issue” was to blame for the elevated reading.
“Whichever case it may be, the data are not supporting a reduction in the policy rate at this time,” he said. “But if 2025 plays out like 2024, rate cuts would be appropriate at some point this year.”
Policy Paralysis
The Fed governor otherwise characterized the economy as solid, with a labour market that is in a “sweet spot.”
Waller acknowledged the new Trump administration’s policies had introduced a degree of uncertainty, but cautioned against allowing that to delay the Fed’s response to economic data.
“We need to act based on incoming data even when facing great uncertainty about the economic landscape,” he said. “Waiting for economic uncertainty to dissipate is a recipe for policy paralysis.”
He also repeated his expectation that tariffs imposed by the administration would “only modestly increase prices and in a non-persistent manner.”
He conceded that their impact on prices could be greater than he anticipates, but added that “other policies under discussion could have positive supply effects and put downward pressure on inflation.”
