Fed’s Waller calls for December rate cut, as hawks press for policy pause

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By Ann Saphir and Michael S. Derby

(Reuters) -A clutch of Federal Reserve bank presidents on Friday aired their discomfort with the U.S. central bank’s decision to cut interest rates this week, even as influential Fed Governor Christopher Waller made the case for more policy easing to shore up a weakening labor market.

This yawning divide within the Fed’s policymaking ranks poses a challenge for Jerome Powell in forging a consensus in his final six months as the chair.

While it is not unusual for Fed policymakers to differ on policy, particularly when the economic data is mixed, the frank expression of that disagreement and the explicit focus on what the Fed ought to do at its next meeting, on December 9-10, was striking.

TO CUT OR NOT TO CUT

“I did not see a need to cut rates this week,” Dallas Fed President Lorie Logan told a banking conference. “I’d find it difficult to cut rates again in December unless there is clear evidence that inflation will fall faster than expected or that the labor market will cool more rapidly.”

“Given the move that we just made, I think we’re right around my estimate of neutral: I think we’re barely restrictive if at all,” Cleveland Fed President Beth Hammack said at the same conference. Like Logan, she does not have a vote on policy this year but opposed this week’s rate cut; both will have a vote next year.

“I do think we need to maintain some amount of restriction to help bring inflation back down to target,” Hammack said.

Waller, who has a permanent vote and is among the candidates President Donald Trump is considering naming Fed chair when Powell’s term is up in May, told the very opposite story.

“The biggest concern we have right now is the labor market,” he told Larry Kudlow on Fox Business Network. “We know inflation is going to come back down, so this is why I’m still advocating that we cut policy rates in December, because that’s what all the data is telling me to do.”

NO DATA FOG

Waller and Logan both said Trump’s tariffs are unlikely to cause a jump in inflation, but while Waller felt that adds to the case for rate cuts, Logan said she was still worried about services prices.

They also agreed that the lack of official economic data during the government shutdown does not create a fog of uncertainty that Powell signaled earlier this week could be a reason for pausing rate cuts.

Logan said private-sector data, state-level unemployment claims and the Fed’s own business and community surveys gave “visibility” into the state of the economy, and back her view that the labor market is not cooling fast enough to need the Fed’s support, particularly with inflation too high and taking too long to come down toward the Fed’s 2% target.

“The fog story has just got to stop: it might tell you to slow down, it doesn’t tell you to pull over to the side of the road,” Waller said. “You may be careful, but it doesn’t mean to stop. And the right thing to do with policy is to continue cutting.”

‘STRONGLY DIFFERING’ VIEWS ON DISPLAY

On Wednesday, after the Fed’s policy-setting committee voted 10-2 to lower its benchmark interest rate to the 3.75%-4.00% range, Powell delivered an unusually clear warning to markets: given “strongly differing views” about how to proceed in December, he said, a rate cut was “not a foregone conclusion, far from it.”  

Atlanta Fed President Raphael Bostic said he was glad the chair had added those words. “I thought that the chair pretty accurately reflected the range of views that are on the committee, and that was information that needed to be out into the public domain,” said Bostic, whose turn to vote at the Fed policymaking table next comes in 2027.

Financial markets pared what had been near-certain pricing for a December rate cut after Powell’s remarks, although bets still reflect twice as high a chance of a rate cut as none.

Bostic had said for most of this year he felt the Fed would need to cut just once this year, as it did in September.

BOSTIC A RELUCTANT SUPPORTER OF RATE CUT

Of the rate cut this week, “I eventually got behind it … because I still think we’re in restrictive territory, and that to me is the most important thing: we can’t really signal or forget that inflation is a significant problem,” Bostic said.

“But with each step, we get closer and closer to neutral in ways that make me uncomfortable.”

Kansas City Fed President Jeffrey Schmid, one of two dissenters against this week’s move, explained on Friday in a written release that he feels that any labor market weakness is “more likely than not” due to structural changes in technology and demographics rather than slowing underlying demand.

“I do not think a 25-basis-point reduction in the policy rate will do much to address stress in the labor market,” Schmid said.

A cut, however, “could have a longer-lasting effect on inflation if the Fed’s commitment to its 2% inflation target comes into question,” he said.

Fed Governor Stephen Miran also dissented this week, as the lone policymaker in favor of a larger half-percentage-point cut. Miran is on leave from his job as White House economic advisor. Trump has called all year for lower rates and intends to install a Fed chair who agrees.

LABOR MARKET RISKS REMAIN, BUT INFLATION A BIGGER PROBLEM

Logan and Hammack notably both said they were sensitive to the risk of labor market weakness, and both said they were watching whether recent announcements of large layoffs by major companies could set a trend.

“The risks to the labor market do lie mainly to the downside,” Logan said.

But “the remaining risks to employment are ones we can monitor closely and respond to if they are becoming more likely to materialize, not ones that currently warrant further preemptive action,” she said.

(Reporting by Ann Saphir and Howard Schneider and Michael S. Derby; Editing by Chizu Nomiyama, Paul Simao, Nick Zieminski and Richard Chang)