The Federal Reserve is treading carefully when it looks at future interest rate cuts, especially as recent economic data suggests the U.S. economy is showing notable strength. Governor Christopher Waller of the Fed laid out his thoughts on the matter during comments made on October 14, stressing the need for caution after the previous month’s significant rate cut of 50 basis points, which brought the federal funds rate down to between 4.75 and 5 percent.
Waller pointed out several trends indicating the economy’s resilience, including strong job growth and sticky inflation. "While we do not want to overreact to this data or look through it, I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting," Waller stated at Stanford University’s Hoover Institution. He feels recent indicators show the economy may not be slowing as much as desired, casting doubt on whether aggressive cuts are warranted at this time.
The mixed data sends policymakers mixed messages. For example, the unemployment rate dropped to 4.1% with the addition of 254,000 jobs in September—far exceeding analysts' expectations. This came after weaker reports over the summer, which had suggested potential slackening. On the other hand, the annual inflation rate for September came at 2.4%, slightly above the expected 2.3%, raising concerns about persistent inflation even as economic growth appears promising.
With GDP growth for the second quarter revised upward to 3% and gross domestic income also seeing upward revisions, Waller emphasized, "These revisions suggest the economy is much stronger than previously thought, with little indication of a major slowdown." This newfound strength raises important questions about how quickly rates should be cut and whether the Fed should reduce policy restraints to avoid economic weakening.
Looking forward, Waller affirmed the baseline expectation remains for gradual reductions over the next year, but he acknowledged upcoming data on inflation and economic activity could sway this inclination. He cautioned, “I will be watching closely to see whether data due out before our next meeting confirms or undercuts my inclination to be more cautious about loosening monetary policy.” Waller added, “The median rate for [Federal Open Market Committee] participants at the end of 2025 is 3.4 percent, so most of my colleagues likewise expect to reduce policy over the next year.”
Market expectations reflect these sentiments, with traders anticipating either another 50-point cut or possibly the smaller 25-point cut at the next meeting. According to the CME FedWatch Tool, there is currently significant speculation surrounding the likelihood of these cuts occurring at the November 6–7 meeting of the Federal Open Market Committee (FOMC).
Waller's cautious approach highlights the delicate balance central bankers must maintain as they navigate the possibly volatile economic waters. This balancing act is emphasized by some members of the committee who previously flagged the risks of cutting rates too much too soon, which could stifle progress against inflation. Their concerns are underscored by the idea of entering what some call the potential for both a 'no landing' scenario, where the economy maintains growth, and the risks of not addressing inflation adequately, allowing it to spiral upwards again.
The intersection of these factors pushes the Fed to remain vigilant. The recent job report, which showed strong hiring, could lead to greater consumer spending, putting additional upward pressure on inflation. This is something Waller believes should steer monetary policy careful and thoughtfully, avoiding rash decisions without full visibility on how the economy is genuinely performing.
Waller's immediate focus will be on several economic indicators—including retail sales and upcoming inflation reports—that will help shape how aggressive the Fed’s next steps should be. He expressed hope for stability and growth, albeit, with the underlying caution necessary to navigate potential pitfalls. The broader message among committee members is clear: the Fed must gradually ease restrictive policies, but with utmost care to not impede inflation control efforts.
