Federal Reserve Board Member Waller: Caution should be maintained at present, and interest rate cuts may be possible later this year.

Key Points

• Federal Reserve Governor Christopher Waller stated on Friday that he maintains a cautious outlook on the current economic situation, but still believes there is a possibility of interest rate cuts later this year.
• In an interview with CNBC, he said, “If the economy runs relatively smoothly and the labor market continues to weaken, I will again call for a reduction in the policy rate later this year.”
• The market has largely ruled out the possibility of interest rate cuts for the remainder of 2026 and early 2027, in stark contrast to pre-war expectations.

Federal Reserve Governor Christopher Waller stated on Friday that he maintains a cautious outlook on the current economic situation, but still believes there is a possibility of interest rate cuts later this year.

Waller had previously supported rate cuts; in an interview with CNBC, he noted that recent changes in the labor market and uncertainty surrounding the war in Iran require a more conservative policy path.

“This does not mean I will remain inactive for the rest of the year,” Waller said on the “Business Report” program, “I just want to observe how things develop. If the economy runs relatively smoothly and the labor market continues to weaken, I will again call for a reduction in the policy rate later this year.”

The market has largely ruled out the possibility of interest rate cuts for the remainder of 2026 and early 2027. This is drastically different from pre-war expectations — traders had previously anticipated two to three rate cuts this year.

However, the surge in oil prices and the uncertainty about the duration of the war have changed market expectations and prompted Waller and other policymakers to rethink their positions. In January, Waller voted against the Federal Open Market Committee’s (FOMC) decision to not cut rates, but earlier this week, he voted in favor of pausing rate cuts along with the majority of members.

His previous dovish stance was due to a marked weakening in the labor market — with almost no net growth in U.S. employment in 2025. However, he pointed out on Friday that the labor force has not expanded either, so even with a decrease of 92,000 jobs in February, “zero net growth” keeps the unemployment rate unchanged.

“If the next employment report shows a decrease of 90,000 jobs, that would make four out of five reports negative. In my view, that is not zero growth. At that point, we should recognize that the labor market is not in good condition,” Waller stated, “I do not think this war will bring any help in the future, but we still need to observe the inflation trends.”

Waller currently holds an optimistic view on overall inflation. He believes that the one-time effects of tariffs will drive up inflation, but aside from that, inflation is structurally moving closer to the Fed’s 2% target.

“If the impact of tariffs does not diminish in the second half of this year, and inflation subsequently begins to rise, we will face a dilemma: should we worry about inflation or risk undergoing an economic recession?” he said, “Therefore, I will closely monitor the performance of the labor market in the future to decide whether to call for rate cuts in upcoming meetings, while also keeping an eye on inflation trends.”

Earlier on Friday, Michelle Bowman, also a Federal Reserve Governor nominated by Trump, stated that she believes the Fed could cut rates three times this year. This would bring the federal funds benchmark rate below the neutral level that FOMC officials consider neither stimulating nor restraining economic growth.

Bowman expressed this position in an interview with Fox Business Channel, although she expects the economy to “grow robustly” this year, supported by “supply-side policies implemented by this administration.”

According to the latest “dot plot” released on Wednesday, Bowman is one of only three Fed officials supporting significant rate cuts this year. The dot plot includes predictions from 19 policymakers.