In a recent appearance in Paris during an event hosted by the Organization for Economic Cooperation and Development (OECD), Federal Reserve Governor Christopher Waller, a prominent voting member of the Federal Open Market Committee (FOMC), expressed his optimistic view on the trajectory of inflation in the United StatesHe believes that inflation will surely continue to descend towards the central bank's target of 2%, paving the way for further reductions in interest rates within this calendar year.

Since September, the Federal Reserve has initiated a series of interest rate cuts over three consecutive meetingsHowever, last month, Fed Chair Jerome Powell, along with several other officials, suggested that there was no urgency to implement further rate decreasesTheir cautious stance primarily stems from ongoing concerns about inflation and a robust labor marketMarket forecasts indicate that the upcoming FOMC meeting scheduled for January 28-29 is unlikely to result in any cuts.

Waller’s remarks stand in stark contrast to this prevailing careful attitude

He contended that the recent modest progress in inflation has ignited calls for a slowdown or cessation of policy rate cutsNonetheless, he remains steadfast in his belief that inflation will continue to progress toward the 2% target over the medium term, thus making additional rate cuts appropriate.

He elaborated on his position, emphasizing that the extent of future monetary easing will rely heavily on the inflation data released moving forwardWaller underscored his benchmark outlook, asserting that he believes more rate decreases will indeed be warrantedShould the situation unfold as he anticipates, he would support continued rate cuts through 2025, tailoring the pace of these reductions based on progress regarding inflation while simultaneously striving to prevent any deterioration in the labor market.

Moreover, Waller also addressed the likelihood of rates returning to near-zero levels anytime soon, articulating that the labor market exhibits a restrictive nature without inducing an economic recession

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On the topics of inflation and labor dynamics, he reiterated his conviction that inflation is likely to march towards the 2% goal, while there are no indications suggesting any imminent substantial weakening of the employment market.

Even if advancements in reducing inflation might experience a slowdown, Waller maintains his expectation that the inflation rate will continue trending downward towards the Federal Reserve's 2% annual target by 2025. He identified several contributing factors for this belief, which include a six-month underlying inflation trend and better-than-expected price data for NovemberAdditionally, the influence of estimating prices, rather than directly observed prices, plays a crucial role when calculating key inflation indicators.

The tumultuous inflation landscape over the last few years has seen several instances of acceleration and deceleration since the onset of the COVID-19 pandemic

Notably, the personal consumption expenditures (PCE) price index—the Fed's preferred gauge—showed a year-over-year increase of 2.8% in November, down from 3.2% the previous yearHowever, the six-month annualized inflation rate for November stood at a lower 2.4%, reflecting a more stable step closer to the 2% targetSpecifically, November's figures, which indicated subdued personal consumption expenditures with a meager 0.1% month-on-month increase, suggest that as higher monthly inflation figures from early 2024 drop out of year-over-year comparisons, the annual rate of price change may continue to decelerate further.

One of the most problematic categories in the recent inflation basket includes housing services and non-market services, both falling under the so-called "calculated prices." These are derived through calculations or estimates rather than direct measurements

According to Waller, these calculated prices may not reliably reflect the overall supply-demand equilibrium of all goods and services in the economy—a critical measure for assessing inflationNotably, these two categories account for approximately one-third of the core PCE basketIn contrast, the prices of the remaining two-thirds of core PCE have seen average gains of less than 2% over the past 12 months ending November.

Geopolitical tensions and their consequences could potentially amplify inflation throughout 2025. Simultaneously, the prospective impact of new U.Sgovernment policies on the economy and inflation remains highly uncertainNevertheless, Waller argued that any increase in tariffs is unlikely to yield a lasting impact on inflation or alter his outlook on interest rates.

Overall, the American economy demonstrates a robust underlying stabilityAnalyzing the economic trajectory over the past nine quarters reveals that the real GDP growth rate has exceeded 2% in eight of those quarters, underscoring the inherent strength of the U.S