Federal Reserve Governor Christopher Waller on Friday expressed caution about current economic conditions but still sees the opportunity for interest rate cuts later this year.
Previously an advocate for rate cuts, Waller said in a CNBC interview that recent developments in the labor market as well as the uncertainty of the war with Iran require a more conservative approach.
"It doesn't mean that I'm going to stay put for the rest of the year," Waller said on "Squawk Box." "I just want to wait and see where this goes, and if things go reasonably well and the labor market continues to be weak, I would start advocating again for cutting the policy rate later this year."
Markets have almost completely doused the chance of rate reductions through the balance of 2026 and well into 2027. That's a switch from expectations prior to the war, when traders had been looking for two or three cuts this year.
But soaring oil prices and an indeterminate time frame over how long the war will last have changed market expectations and caused a rethinking from Waller and other policymakers. Waller had dissented in January from a Federal Open Market Committee decision not to cut, but went along with the majority earlier this week for another pause.
His earlier dovish position was motivated by a clearly weakening labor market, which produced nearly no net job growth in 2025. However, he noted Friday that the labor force also is not expanding, so "net zero" growth is still leaving the unemployment rate unchanged, even with a 92,000 drop in nonfarm payrolls in February.
"If we get another 90,000 jobs decline in the next jobs report, that'll be like four negative reports out of five. To me, that's not zero. So at that point, you need to start thinking about this labor market isn't good," Waller said. "I don't think this war is going to help in any way going forward, but we'll have to see what happens with inflation."
Waller is generally sanguine now about inflation, which he sees being boosted by one-off effects from tariffs but otherwise moving structurally towards the Fed's 2% goal.
"If those tariff effects don't roll off by the second half of the year, and then inflation starts rising then, then you're in this tricky business of like, do we worry about inflation? Take a chance on recession or not?," he said. "So I'm really going to keep an eye on what the future labor markets look like to see whether I want to start advocating for rate cuts in future meetings, but I also want to see what happens with inflation."
Earlier Friday, Fed Governor Michelle Bowman who, like Waller, was nominated for the job by President Donald Trump, said she believes the Fed can cut three times this year. That would take the benchmark federal funds rate below the neutral level that FOMC officials see as neither supporting nor restricting growth.
Bowman, in a Fox Business interview, took that position even though she said she expects "strong growth" this year "supported by the supply-side policies that this administration is putting into place."
Bowman is one of just three Fed officials who see aggressive rate cuts this year, according to an update of the Fed's "dot plot" grid released Wednesday. A total of 19 policymakers participate in the grid.
Facts Only
* Christopher Waller, Federal Reserve Governor, expressed caution regarding economic conditions.
* Recent developments, including the Iran war and labor market trends, have led to a more conservative approach.
* Previously a proponent of rate cuts, Waller now sees opportunity only with further deterioration of the labor market.
* Market expectations for rate reductions have declined significantly.
* Oil prices and the uncertainty of the Iran war are influencing market sentiment.
* Waller dissented in January regarding a non-cut decision but supported the pause in February.
* Net job growth is currently at zero, maintaining the unemployment rate.
* Waller believes tariffs will eventually reduce inflationary pressures.
* Governor Michelle Bowman predicts three rate cuts this year.
* The Fed’s “dot plot” indicates only three policymakers see aggressive rate cuts.
Executive Summary
Full Take
The narrative presented by Waller and Bowman reflects a fundamental shift in the Federal Reserve’s policy outlook, driven by an unforeseen confluence of geopolitical and economic uncertainties. Waller’s pivot—from a relatively dovish stance to a cautious wait-and-see approach—signals a recognition of the potential for the Iran war to significantly disrupt global supply chains and exacerbate inflationary pressures. The “net zero” job growth data is particularly revealing, suggesting a labor market that is not exhibiting the clear weakness initially predicted by the Fed, yet Waller rightly insists on monitoring for signs of sustained decline. This points to a core assumption—that the weakness will manifest – that is now being actively tested. The divergence of opinion with Governor Bowman highlights the inherent tension within the Fed regarding growth versus inflation, further demonstrating how seemingly disconnected economic signals can drastically alter policy trajectory.
The significant drop in market expectations for rate cuts reveals a degree of market skepticism regarding the Fed’s ability to deliver on its commitments, exposing the vulnerability of central bank forecasts to external shocks. Waller’s focus on the labor market as a key indicator is a consistent element of Fed strategy, but the persistence of “net zero” growth—despite the February drop—suggests a longer-term challenge than initially anticipated. This situation embodies a classic “motte-and-bailey” tactic, with Waller strengthening the weakness of the initial argument (net zero) to increase the scope of his future advocacy. The fact that Bowman’s outlook is still considerably more optimistic exposes a difference in fundamental assumptions about the impact of government policy, a difference that is likely to further complicate the Fed’s decision-making process. The pattern of shifting perspectives highlights the systemic vulnerability of monetary policy to unpredictable external events and the challenges inherent in forecasting in an era of heightened global instability.
Patterns detected: ARC-0043 Motte-and-Bailey, ARC-0024 Ambiguity
Sentinel — Likely Human
This article presents a balanced account of Federal Reserve Governor Waller's evolving views on interest rate policy, influenced by labor market data and geopolitical uncertainty. While the writing style is conventional and relatively cautious, it doesn't exhibit strong characteristics typically associated with AI-generated content.