Federal Reserve Governor, Christopher Waller, was interviewed by Michael McKee on Bloomberg TV this morning. This interview comes two days before the Federal Reserve blackout period begins and was unscheduled as of earlier this week suggesting Waller wanted to emphasize his dovish point of view. There isn’t a debate about lowering rates at the Fed’s upcoming May 7th meeting (at least not yet, there is a lot of data before that meeting), but I suspect Waller did this interview to help keep financial conditions easier (yields down) in the meantime. FOMC members won’t be able to speak from this coming Saturday through Thursday May 8th, the day after their next meeting on May 7th—leaving about two weeks without Fed guidance. In the interview, Waller made several interesting comments that further emphasized his pivotal speech last week.

Waller doesn’t think the Fed will be cutting rates until the second half of the year because tariff effects won’t start in earnest until then, but also admits that effects to the real economy from uncertainty will happen immediately [video],

“But it’s not like you’re not going to see anything on the real side because of all the uncertainty in terms of freezing decisions, spending decisions.”

The bond market doesn’t expect rate cuts until the second half either. The first full rate cut is priced into the bond market only as-of the July 30th meeting. I think they will cut no later than the June 18th meeting because economic data has already weakened so much (more on that below). Waller doesn’t see any further cushion to the unemployment rate from vacancies after the pandemic from employee shortages [video],

“…it’s not like 2022, where you can reduce vacancies. Now, if labor demand pulls back it’s going to be in terms of bodies, so you’ll see employment start to drop.”

Tariffs are a one-time price-level effect, and the expected demand slowdown will help to offset inflation [video],

“I still strongly believe, just economics tells me that the tariffs are a one-time price level effect that’s going to pass through. Now its one-time level doesn’t mean it’s small or big, it’s just a one-time. So, I still think that even if it is fairly large, you would see a one-time price-level effect. The demand slowdown would offset some of that. As consumers back off, employment goes down, unemployment rises, financial wealth declines, you will see demand effects from that, that will put downwards pressure on inflation. So, it may not be as high as people think.”

And he further clarifies that it isn’t just the labor market [video],

“… if I saw enough movement in the unemployment rate to make me think that things were going bad or growth prospects started tanking or consumer spending started really going down, then I’d be ready to go. I wouldn’t be sitting here waiting to determine whether the inflation is transitory or not—it’s time to worry about the real side of the economy.”

This is an important distinction that began to appear from Richmond Federal Reserve Bank President, Tom Barkin’s appearance on Tuesday where he said, “I think there’s lots of reasons to be worried about consumer spending.” Typically, the Fed only worries about consumer spending once labor weakens, but Waller and Barkin are laying the groundwork for the possibility that consumer spending may start to decline before the labor market weakens. The Department of Education announced on Monday that student loans in default will be moved to collections starting in May after five years which will add to consumer spending woes. Ultimately, consumer spending is what the Fed cares about because it is the engine of the economy, it’s just that labor market weakness typically predicts when it will fall and suggests it will be sustained.

Economic data continues to weaken quickly (see arrow in chart below) which I think is starting to soften the Fed’s hawkishness, evident with Thomas Barkin, Neel Kashkari, and Christopher Waller this week. The Lantern Daily Economic Index (LDEI), a measure of the totality of the economic data, has fallen a significant 10 points just from Christopher Waller’s speech last Monday mostly from weaker industrial production, housing starts, existing home sales, S&P’s service-sector PMI, and durable goods orders (less transportation). With data weakening this way, I cannot imagine the Fed lasting three-plus more months (to the July 30th meeting) without lowering rates. I think the Fed will lower rates by their June 18th meeting and quite possibly before.