The consumer price index (CPI) showed signs of slowing, with a 3.2% core reading for December, indicating a slight decrease from the previous month. This core reading, which excludes volatile food and energy prices, has dropped by 0.1 percentage point. Despite this progress, the Federal Reserve's 2% target for inflation remains elusive. In response, Fed Governor Christopher Waller stated that the central bank is not in a hurry to make any immediate decisions regarding interest rates.
Expectations for a second interest rate reduction by the year's end have risen to approximately 55%, with market-implied odds for a rate cut in May standing at around 50%. However, June appears to be a more likely candidate for such a move, according to CME Group data. Traders have become more optimistic about the prospect of a more aggressive pace of rate cuts following remarks made by Waller.
Waller expressed optimism that inflation will continue to ease throughout the year, aligning with market sentiments. The Federal Open Market Committee (FOMC) is scheduled to meet next on January 28-29, but markets are currently pricing in almost no chance of any significant moves during this meeting. According to Waller, the first rate cut is expected within the first half of the year, contingent on favorable economic data regarding prices and unemployment.
"As long as the data comes in good on inflation or continues on that path, then I can certainly see rate cuts happening sooner than maybe the markets are pricing in." – Christopher Waller
He emphasized that future actions will be driven by ongoing data assessments.
"That's all going to be driven by the data. I mean, if we make a lot of progress, you could do more," – Christopher Waller
However, Waller cautioned that if inflation remains persistently high, the pace of rate cuts could be adjusted accordingly.
"If the data doesn't cooperate, then you're going to be back to two and going maybe even one, if we just get a lot of sticky inflation," – Christopher Waller
Waller highlighted the importance of upcoming economic indicators and maintained a cautious stance.
"Well, January, we need to kind of see what's going to happen…. We're in really no rush to do things," – Christopher Waller
Despite current challenges, Waller remains hopeful about reaching the Fed's inflation targets.
"Right now, I think inflation is going to continue to come in towards our target. The year over year, stickiness that we saw in 2024 I think will start to dissipate," – Christopher Waller
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