Fed could cut rates sooner if disinflation trend continues: Waller

The Fed is anticipated to hold its benchmark overnight rate steady in the 4.25 per cent-4.50 per cent range at its meeting later this month, but investors had expected the pause to last June

Inflation is likely to continue to ease and possibly allow the US central bank to cut interest rates sooner and faster than expected, Federal Reserve Governor Christopher Waller said on Thursday in comments that pushed against recent market moves that anticipate a shallower Fed rate path. 

Inflation "is getting close to what our 2 per cent inflation target would be," Waller said on CNBC, citing estimates indicating that one key measure of underlying inflation, the Personal Consumption Expenditures Price Index excluding food and energy costs, has been close to the Fed's target for six of the past eight months. 

"If we continue getting numbers like this, it is reasonable to think rate cuts could happen in the first half of the year ... I am optimistic that this disinflationary trend will continue and we will get back closer to 2 per cent a little quicker than maybe others are thinking," Waller said, adding that as many as three or four quarter-percentage-point rate reductions could still be possible this year depending on how inflation behaves. 

"If inflation is down and the labor market stays solid, you could think about restarting rate cuts several months from now ... I don't think March could be completely ruled out," Waller said, referring to the Fed's March 18-19 policy meeting. "If we make a lot of progress, you could do more." Waller's somewhat dovish narrative, coming near the Fed's blackout period on public comments ahead of the Jan. 28-29 meeting, immediately shifted market expectations about where the central bank stands at the start of the incoming Trump administration. 

The Fed is anticipated to hold its benchmark overnight rate steady in the 4.25 per cent-4.50 per cent range at its meeting later this month, but investors had expected the pause to last until perhaps June, with only a single rate cut this year. 

Traders on Thursday were betting on two rate cuts as more likely, with a good chance the first comes as early as May. Bond yields also fell.