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one of the most influential senior officials of the federal reserve, board member waller, recently mentioned the possibility of a "front-loaded" interest rate cut. he made it clear that he supports the fed's interest rate cut at the september fomc meeting and said that it is important to support a slowing labor market.

on friday, fed governor waller said that recent data requires the fed to act and it is important to start cutting interest rates at the next fomc meeting:

given the continued progress on the inflation front and a cooling labor market, i believe it is time to lower the target range for the federal funds rate at the upcoming federal reserve meeting.

waller did not specify how much he thought the fed should cut rates or how often, saying determining the pace of rate cuts and the overall size of the eventual reduction in the policy rate were decisions to be made in the future.

although he did not say so explicitly, waller struck a dovish tone, saying he was willing to accept that the fed might need to take aggressive measures to keep the labor market functioning as inflation improves toward the fed's 2% target:

if appropriate, we will advocate "front-end" interest rate cuts and maintain an open attitude towards the intensity and speed of the cuts.

if the data shows that a larger rate cut is needed, then i would also support it. if the us labor market deteriorates faster than expected, the fed should take larger rate cuts, which would make a soft landing more likely.

moreover, i do not expect this first rate cut to be the last. with inflation and employment approaching our longer-run goals and the labor market slowing, a series of rate cuts may be appropriate.

regarding the labor market, which is of great concern to the market, waller pointed out that the us job market continued to weaken, but it did not deteriorate. the unemployment rate has risen, mainly due to the increase in labor supply. compared with the inflation problem, the risks faced by employment are more prominent.

before waller's speech on friday, the u.s. bureau of labor statistics released the heavyweight non-farm payrolls data for august, and the overall report was mixed:

the u.s. nonfarm payrolls increased by 142,000 in august, lower than the expected 165,000. the july data was revised down from 114,000 to 89,000, and the june data was revised down by 61,000.

the unemployment rate fell to 4.2% in august from 4.3% in july, in line with expectations. this was the first decline in the unemployment rate since march this year.

in august, hourly wages rose 3.8% year-on-year, slightly higher than the expected 3.7% and the previous value of 3.6%; hourly wages rose 0.4% month-on-month, with the expected and previous values ​​of 0.3% and 0.2% respectively.

in terms of inflation, waller believes that the economy is on track to reach the fed's 2% inflation target.

waller also said the u.s. economy is neither in recession nor expected to move toward one.

media analysis pointed out that although other fed policymakers have recently advocated easing monetary policy as soon as possible, waller's statement is the clearest signal. waller repeated the wording used by fed chairman powell at the end of august - "the time has come" to adjust monetary policy.

after waller's dovish comments, traders raised their bets on the fed's easing outlook. the 10-year u.s. treasury yield fell in the short term, hitting a daily low of 3.6443% when waller spoke, and fell 8.26 basis points overall during the day, breaking away from the daily high of 3.7589% that rebounded in early trading after the release of the non-farm payrolls report. the decline in u.s. stocks narrowed in the short term.

interpretation of the “new federal reserve news agency”

although the market's initial reaction to waller's latest speech was dovish, nick timiraos, a well-known financial journalist known as the "new fed news agency", suppressed the market's overly optimistic expectations, pointing out:

fed governor waller's speech did not explicitly mention 25 or 50 basis points. he tends to support a 25 basis point rate cut at the beginning, and explicitly retains the option of accelerating the rate cut when new data show further deterioration.

timiraos said waller praised the fed for not overreacting to the banking crisis, lower inflation readings in the second half of 2023 and higher inflation readings in the first quarter of 2024. then he said: "based on the evidence i see, i do not believe the economy is in a recession or heading for a recession."

timiraos said note these “if” statements in waller’s speech:

if the data shows that a larger rate cut is needed, then i will support it. when inflation accelerates in 2022, i am a strong supporter of frontloading rate hikes, and if appropriate, i will also support frontloading rate cuts.

those decisions will be driven by new data.

i expect these rate cuts to proceed cautiously as the economy and employment continue to grow, but i stand ready to act quickly as needed to support the economy, while inflation remains stable.

timiraos interpreted that the so-called new data probably does not include today's data.

after timiraos's interpretation, the u.s. stock market fell back, and then the decline widened. on friday, many assets generally fell sharply, and the u.s. stock market plummeted:

the market's expectations for a rate cut have also retreated: