Federal Reserve Governor Christopher Waller has finally stated what markets have been pricing in for months: interest rate cuts are likely coming in the next three to six months, with September emerging as the probable starting point.
Let's be honest—this announcement lands with all the surprise of discovering that rush hour traffic is, in fact, unpleasant.
"The time is approaching," Waller said in remarks that represent a notable shift from the Fed's previous "higher for longer" mantra that dominated 2023's monetary policy discussions. The markets, which had already been anticipating this move, responded with what could charitably be described as muted enthusiasm.
I've been covering Fed policy since before the pandemic, and there's a familiar rhythm to these pivots. They start with subtle linguistic shifts, progress to what insiders call "preparing the market," and eventually culminate in action. We're firmly in phase two of that dance.
The timing here deserves at least a raised eyebrow. A September rate cut would arrive—purely coincidentally, I'm sure—just weeks before a contentious presidential election. Not that the Fed would ever consider the political calendar when making monetary policy decisions... (Stop smirking, I can see you.)
What's particularly interesting about Waller's comments is how they reflect the Fed's growing confidence that inflation is indeed returning to their 2% target. Core PCE inflation—which excludes food and energy because apparently the Fed thinks people don't need to eat or drive—has been moderating in recent months.
The current federal funds rate sits between 5.25% and 5.50%, the highest level in more than two decades. That's like using a sledgehammer when eventually you'll need to switch to a scalpel.
"The Fed has done enough," explained Mark Zandi, chief economist at Moody's Analytics, when I spoke with him after Waller's comments. "They've got inflation on the run without breaking the labor market. Now it's about timing the pivot to avoid overshooting."
The central bank finds itself in that awkward position of needing to acknowledge economic reality without admitting they might have gone too far with their aggressive rate-hiking campaign. It's the monetary policy equivalent of slowly backing away from an argument after realizing you've overplayed your hand.
For investors, this signals a potential shift in market dynamics. Growth stocks—you know, the ones that got absolutely clobbered during the rate-hiking cycle—might find new favor. Bond yields could drift lower. And the housing market? Well, after being about as lively as a funeral parlor during a power outage, it might finally see some signs of life.
But don't expect miracles.
The Fed will move with all the speed and decisiveness of a sloth contemplating its next meal. September is just the beginning of what will likely be a gradual, data-dependent easing cycle.
Look, the bigger picture here is that we're witnessing the beginning of the end of this tightening cycle. After its most aggressive rate-hiking campaign since the Volcker era (when rates hit an eye-watering 20% in 1981—can you imagine?), the Fed is preparing to shift gears.
Having watched this institution navigate post-crisis monetary policy for years, I can tell you one thing with certainty: they'll take their sweet time getting to where everyone already knows they're going.
In the meantime, market participants will continue doing what they do best—overanalyzing every Fed utterance, parsing statements for hidden meanings like medieval scholars interpreting religious texts. Because in today's financial world, central bankers are the high priests, and their words carry weight... even when they're just stating the obvious.
