After months of the Fed avoiding any discussion of the economy weakening (see here and here), Federal Reserve Governor Christopher Waller, in a CNBC interview with Steve Liesman on Friday, finally acknowledged what has become stark in the economic data (LDEI), the economy is becoming worrying. The interview expressed his view that interest rates should start to be cut at the FOMC’s next meeting on July 30th. It was a bold statement given that the bond market is priced for the first cut to come two meetings later in October. Four exchanges between Liesman and Waller, transcribed below, summarize the interview which sounds an awful lot like the ‘insights page’ of Lantern Capital, ha.

1. An exchange about Waller’s concerns for the economy,

Liesman: Do you have concerns now for the labor market?, we just talked about the Philly Fed being negative and you have this modest rise in jobless claims and of course something of a step down along with recent revisions downward to the employment levels. Do you have concerns for the job market?

Waller: Yeah I’m watching it. I mean, it’s solid. It’s been kind of amazing, the unemployment rate has stayed right around 4.2 to 4.3 for a year, just hardly moving. But we are starting to see things. Like, if you look at….there was a story in the Wall Street Journal earlier this week that the unemployment rate for new graduates is at a 20 or 25 year new high. College graduates are not finding jobs, their unemployment rate is 7%. Pre-pandemic it was 5. So it’s that kind of data that’s starting to make me a little worried. We’re seeing job creation coming down. We’re seeing a lot of things, like you just said with the Philly Fed, that are suggesting that maybe the labor market is starting to soften more than we might want it to. And so, in my view, if you’re starting to worry about the downside risks in the labor market, move now, don’t wait. People love to talk about long and variable lags. Why do we want to wait to actually see a crash before we start cutting rates. So I’m all in favor of saying that maybe we should start thinking about cutting the policy rate at the next meeting because we don’t want to wait until the job market tanks before we start cutting the policy rate.

2. An exchange about following the economic data to cut rates and looking through any inflation resulting from tariffs,

Liesman: So let’s talk about this, I guess, difference of opinion with some on the committee. Obviously, the SEP showed that, the forecast showed that 7 members don’t want to cut rates at all. What is the urgency right now in your mind to cut interest rates. Why wouldn’t you just want to wait and see what happens to tariffs and inflation in the coming months before you start cutting interest rates?

Waller: Right, so we’ve been on pause for six months thinking there was going to be a big tariff shock to inflation, we haven’t seen it. We follow the data, that is what we do. We look at the data and should be basing policy based on the data and as I said, if you look forward, if you think this inflation is going to hit in August or September, it doesn’t matter, it is the same impact, it is just a matter of timing and I’ve been arguing since a year ago that central banks should be looking through this. This has been debated for 50 years in central banking and the standard rule of thumb is you look through these types of price shocks and that’s what I think, that’s what I’m arguing we should do. So, if that’s the case start moving on cutting the policy rate.

3. An exchange about how much inflation will be affected by tariffs which echoes his comments from last month. It is also directly opposed to Powell’s comments at the FOMC meeting press conference Wednesday where he said “everyone he knows” thinks inflation will rise “meaningfully”,

Liesman: …what’s your forecast for how tariffs affect the inflation rate? It looked like there was some impact from tariffs in the May report, they were offset by other factors that seemed to go negative. How much would you think tariffs will add to the CPI or PCE which you follow.

Waller: Yeah, so I mean, I think, Steve, you’ve said this many times, there’s some things that are going to go up because of the tariffs, but there’s other things that are gonna tend to offset it. That’s why you can’t just look at one category of goods and say, oh that’s driving everything. And I think that’s what’s surprised everyone in these last inflation reports. And I think that kind of thing will just continue. In terms of inflation, I’ve long argued that if you had…if the effective tariff rate got down through negotiations to like 1%, 10%, 10%….imports make up 10% of the price index. So a 10% tariff on 10% of the goods is only a 1% increase in the total price level and that’s if it is completely passed through. We already know that this is not being completely passed through. As Chair Powell was talking about, actually in his press conference, everybody has to eat a little bit of the pain from the tariffs and so not all of this is going to get passed through. So, you might see the price level going up three tenths to half a percent, but that’s it. It’s not going to cause persistent inflation and every model I’ve seen from private sector forecasters, everything, shows by the middle to the end of next year, the inflation rate comes right back down. It’s a one-time level effect.

4. An exchange about wanting to cut rates despite the rest of the committee’s reservations,

Liesman: Big debate and you can see it in the outlook for rates from of the summary of economic projections. Where do you stand in this debate right now over how much concern we all should have over coming potential inflation from tariffs?

Waller: Steve, you know as I’ve been saying for probably a year, I think the important thing for central banks to do is to look through tariff effects on inflation. This is a long standing view going back 40, 50 years. So, any tariff inflation we should see, and I’ve given various estimates, and I don’t think it is going to be that big, and we should just look through it in terms of setting policy, and look at the kind of underlying trend of inflation. And right now, the data in the last few months has been showing that trend inflation is looking pretty good, even on a 12-month basis. So, I’ve labeled these good news rate cuts, if inflation comes down to target, we can actually bring rates down, I’ve been saying this since about November of ‘23. So, I think we are in that position and we could do this as early as July.

Liesman: You think you could cut rates as early as July?

Waller: Well, I think — that would be my view, whether the committee would go along with it or not, but we are in the position that the data is good, GDP growth is going to be near target, near the long-run target in the first half of this year, unemployment is at our long-run target, inflation is running very close to target, yet we are a 100 to 150 basis points above where the median long-run neutral policy rate is. So, I think we’ve got room to bring it down and then we kind of see what happens with inflation. If it got really bad and people got really nervous, you could just pause. But I think we are in a good spot for talking about bringing the rate down.

The Martha Seger connection

Earlier this year, I wrote how similar this business cycle is playing out compared to 1990. After the Treasury yield sell-off in April and May with fiscal anxieties, that similarity has risen to such an uncanny level, it deserves another writing, but that will come another time. Part of that story is Federal Reserve Governor Martha Seger, who was the lone FOMC member warning of economic weakness as that recession began while the Fed was looking elsewhere; determinedly paused, worried about large deficits and inflation from an oil price shock resulting from Iraq invading Kuwait. Replace “oil price shock” with “tariff inflation” and you have a close facsimile for now.

Martha Seger was the first woman appointed as Governor of the Federal Reserve in 1984. An individualist, not beholden to any particular economic theory, and only scraped through the Congressional confirmation process after stiff resistance due to her lack of being “in the club”, she was an outsider throughout her time at the Fed. Upon her final confirmation in 1985, the New York Times wrote a profile about her (pictured above),

The economist, who stands 6 feet 1 inch tall and is thus the only governor who comes close to looking 6-foot 7-inch Paul A. Volcker, Fed chairman, in the eye, is said by those who know her to be very outspoken. So far, however, she has avoided speaking out in public, probably because of the drawn-out confirmation process during which she was long opposed by all eight Democrats on the Senate banking committee. ”She marches to her own drummer,” said Don R. Conlan, president of Capital Strategy Research Inc., in Los Angeles, who was first hired as an economist by Miss Seger, when she was at the Federal Reserve Bank of Chicago. ”There will come a time when her individuality will show.”

She was alone then, like Christopher Waller is now, but right. Ultimately, the Fed started cutting rates in October of 1990 with abandon over the next two years (they cut rates 5.00% from this point) once the recession was clear, oil prices started coming back down and the 1991 budget was settled. This was a time, just like now, where there wasn’t a big signature reason or theme why the economy should have a recession (like what many remember from the dot-com bubble in 2000 or housing bubble in 2008), the Fed had cut preemptively a year before this point making many think a prior recession scare had been fixed (think: September-December of last year), and the US had a high debt service to GDP ratio (3%, like now) which trained many eyes to fiscal concerns rather than the economy.

I expect economic data will continue to weaken (watch the LDEI) because the economy is in the part of the cycle where things start to deteriorate faster. Housing, consumer, inflation, and labor weakness have all arisen in the last three months. As that happens, Waller’s view about cutting rates in July will become contagious to the rest of the committee. Just this morning, Federal Reserve Governor Michelle Bowman became the second FOMC member to express Waller’s view, saying in a speech,

Before our next meeting in July, we will have received one additional month of employment and inflation data. If upcoming data show inflation continuing to evolve favorably, with upward pressures remaining limited to goods prices, or if we see signs that softer spending is spilling over into weaker labor market conditions, such developments should be addressed in our policy discussions and reflected in our deliberations. Should inflation pressures remain contained, I would support lowering the policy rate as soon as our next meeting in order to bring it closer to its neutral setting and to sustain a healthy labor market. In the meantime, I will continue to carefully monitor economic conditions as the Administration’s policies, the economy, and financial markets continue to evolve.

With data weakening quickly, I expect the Fed to ultimately cut in July and a recession to begin in the next few months.