Governor Waller’s Insights: Navigating the Future of Our Economy

Thank you, John, for having me here today. I want to share my thoughts on why I believe the Federal Open Market Committee (FOMC) should cut our policy rate by 25 basis points at our next meeting.

Let’s get straight to it. First, tariffs tend to cause prices to rise temporarily, not permanently. Good central banking practice tells us to ignore these short-term price hikes, especially since inflation expectations are stable.

Second, current economic data suggest our monetary policy needs to shift closer to neutral. Recent estimates put real GDP growth at about 1% for the first half of this year. That’s significantly below what most FOMC members believe is the economy’s true potential. The unemployment rate is steady at 4.1%, and inflation is hovering just above our target of 2%. This means our policy rate should be moving down toward neutrality, which is around 3%.

Lastly, while the labor market seems stable, signs indicate it’s starting to cool. Private-sector payroll growth is slowing, which could mean trouble down the road. Given that inflation is near target, we shouldn’t wait for a downturn before acting on interest rates.

Let’s look closer at the economic activity we’ve seen. When we combine the first and second quarters of this year, we see growth of just 1%—down from 2.8% at the end of last year. Most forecasts don’t predict much improvement for the second half of this year, which is worrisome. Consumer spending, which accounts for a significant portion of our economy, is also declining, projected to grow at just 1% as disposable income slows due to tariff effects.

The Federal Reserve’s July Beige Book paints a mixed picture of economic activity. Some areas are growing, but several are flat or declining. Surveys of purchasing managers reveal contractions in manufacturing, while non-manufacturing shows slight expansion.

Now let’s touch on the labor market. The unemployment rate remains steady, but deeper analysis reveals a troubling trend. Most of the recent job growth comes from the government sector, while private sector gains are waning. Reports show that new college graduates are struggling to find jobs, with their unemployment rate at a decade high.

When we assess market dynamics, the Job Openings and Labor Turnover Survey shows low hiring and firing rates. This cautious approach ensures that employers hold onto workers to avoid shortages. However, with demand softening, companies may eventually need to make deeper cuts.

Turning to inflation data, the latest reports suggest rising consumer and producer prices. June’s consumer price index indicates an inflation rate nearing 2.5%. This small uptick is largely influenced by tariffs, which are expected to push prices slightly higher. However, most research indicates tariffs lead to temporary price boosts rather than a sustained inflation rise.

Interestingly, studies tracking price changes since February show only moderate increases. Retailers, needing to keep customers, may limit how much they pass increased costs onto consumers.

Looking forward, my belief is that inflation will stabilize and remain around our 2% target if we manage the trends correctly. Unlike in 2021 and 2022, when inflation surged due to pandemic disruptions, today’s economy shows signs of slowing.

In short, my analysis of the current economic landscape indicates that the FOMC should reduce rates now. With potential risks on the horizon, acting sooner could prevent more significant issues later. If we adjust our target range now and later data suggests we don’t need further cuts, we maintain the flexibility to adapt.

For these reasons, I strongly believe a 25 basis point cut is warranted at our upcoming meeting. Should inflation remain stable, we can consider further adjustments to align our policy with economic realities.

For more details on the Beige Book and other resources, please check the Federal Reserve’s official website.

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