In the wake of the August Payroll Report, let’s review the Fed’s dilemma and the views of Fed Governor Chris Waller, one of the frontrunners to be the next Fed Chair.
Is monetary policy restrictive? Yes, by a number of measures. The Cleveland Fed recently published a study that estimated r-star, or the neutral rate of interest, and concluded: “The model estimates the implied (medium-run) nominal neutral interest rate to be 3.7 percent, with a 68 percent coverage band ranging from 2.9 percent to 4.5 percent. Given that the effective nominal federal funds rate is currently in the range of 4.25 percent to 4.5 percent, this model estimates with a high level of certainty (77 percent probability) that the policy stance is in restrictive territory.” In addition, the 2-year Treasury yield, which is the market’s estimate of the terminal rate, has been falling.
Will the Fed cut rates at the September meeting in response to labour market tensions? Most likely. Fed Chair Powell pivoted to emphasizing the Fed’s full employment mandate in his Jackson Hole speech. Fed Governor Waller has been making the rounds pounding the table about labour market weakness. The weak August Payroll Report makes a September rate cut a virtual certainty.
What about the Fed’s price stability mandate? Inflation indicators are rising in the short run in response to the imposition of tariffs. There is some dispute about whether inflation expectations are well anchored or rising.
What follows is an examination of Governor Waller’s view on monetary policy and the implications for Fed independence. What is his economic case for rate cuts and is it based on sound data, theory and solid judgment?
The full post can be found here.
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