Fed Governor Chris Waller on interest rate outlook: Caution is warranted

Summary

• Fed Governor Christopher Waller details a significant shift in his policy stance, moving from advocating for a near-term rate cut to advocating for caution and a "wait-and-see" approach.
• The shift is driven by two primary data points: 1) A protracted closure of the Strait of Hormuz suggests oil prices will stay high longer than initially thought, raising inflation concerns, and 2) Recent research indicating labor force growth will be near zero for the year, meaning net job gains around zero are sufficient to keep the unemployment rate stable.
• Waller expresses intellectual acceptance of the zero-job-growth math but admits a deep, gut-level discomfort with it, noting such a figure would have been unthinkable historically.
• He outlines a critical framework for oil shocks: transient spikes can be looked through, but persistent high prices eventually bleed into core inflation as oil is a major intermediate input, necessitating a policy response.
• He references the 1970s as a period of sequential oil shocks that became embedded, leading to policy mistakes, but cautions that the current wisdom of "looking through" oil shocks only applies to temporary movements.
• On inflation, Waller presents a contrarian mathematical argument: if tariffs added 50-100 bps to inflation and headline PCE remained at 2.8%, then underlying structural inflation had to have fallen to compensate, suggesting it may be "getting closer to two."
• He downplays the need for rate hikes, arguing the stable 2.8% inflation rate despite tariffs indicates no structural breakout. He maintains a conditional bias to cut later in the year if the labor market remains weak and the oil situation improves.
• He draws a direct parallel to March 2022, when the invasion of Ukraine caused the Fed to pause its planned aggressive lift-off, illustrating his current "caution is warranted" mindset.