The Federal Reserve’s Waller suggests moving US interest rates to a more neutral stance. He would favour a 25 basis points cut at the September meeting and anticipates additional rate cuts over the next three to six months.
Waller’s View on Current Policy Rate
Waller views the current policy rate as moderately restrictive, approximately 1.25 to 1.50 percentage points above neutral. He believes a larger September cut is unnecessary unless the August jobs report shows substantial weakening, with inflation remaining controlled.
Waller aimed for a rate cut in July and feels more strongly about it now, attributing this to a weakening labour demand. He expresses concern about increased downside risks to the labour market.
The Federal Reserve’s next meeting is scheduled for September 16 and 17, with a rate cut expected despite high inflation. Bets on a rate cut increased after the revision of labour force data in the previous Non-Farm Payroll report. Inflation, barring temporary tariff effects, is near 2%.
With Fed Governor Waller now openly calling for a rate cut, the path for the September 16-17 meeting seems clear. We see his comments as a strong signal that the central bank is ready to pivot towards easing monetary policy. This shift is driven by a desire to get to a more neutral stance before the economy weakens further.
Latest Jobless Claims Data
The data appears to be supporting this dovish turn. The latest weekly jobless claims number that came out today, August 28th, showed a jump to 310,000, the highest level we’ve seen this year. This confirms Waller’s concerns that downside risks to the labor market are increasing and will be a key focus ahead of the next jobs report.
For traders, this reinforces bets on lower rates, making positions in SOFR futures for September and December attractive. Given that Waller anticipates additional cuts over the next three to six months, we are looking at contracts for the first quarter of 2026 as well. This is about positioning for a series of cuts, not just a single event in September.
The options market is also signaling increased movement ahead. With a rate cut now almost fully priced in, the main uncertainty is the pace of future cuts and how the economy reacts. We are seeing increased interest in buying options on interest rate-sensitive ETFs to play the expected rise in volatility around upcoming Fed meetings and data releases.
This situation is reminiscent of past easing cycles, like the Fed’s pivot in 2019 after a period of tightening. History suggests that once the Fed starts cutting, it often continues for several months until the economic data stabilizes. We are positioning for a similar pattern to unfold, especially after the aggressive hiking cycle of 2022-2024.
However, we must watch inflation, as the last core PCE report for July came in at 2.6% year-over-year. This is still above the Fed’s 2% target and creates a risk that the central bank might have to be more cautious than Waller suggests. A surprisingly strong inflation print could easily upset these dovish expectations.
