Policy Path Constrained by Expanding Data Blind Spot
Christopher Waller, a member of the Federal Reserve's Board of Governors, recently reiterated in a public speech that he supports a 25 basis point interest rate cut at the October FOMC meeting to address the dual pressures of economic slowdown and a weak labor market. However, he also warned that the government shutdown and the lack of key economic data are weakening the effectiveness of monetary policy-making, making future paths uncertain.
Waller pointed out that due to the shutdown causing a temporary halt in data from agencies like the Department of Labor and the Department of Commerce, the Federal Reserve faces a "policy blind spot" when assessing inflation and employment trends. He stated, "We need to rely on data to make decisions, but now the data is incomplete, posing a risk of overly aggressive actions."
Clear Intent to Cut Rates but Cautious in Scale
Within the Federal Reserve, there is still a debate on whether to further ease policy. Waller believes that a moderate rate cut can provide the necessary buffer for the economy, but a large cut could mislead the market and exacerbate inflation risks. He emphasized that the Fed "must proceed cautiously," especially when facing mixed signals from the labor market.
"Job growth is slowing, but the unemployment rate remains within an acceptable range, and wage increases have slightly moderated," Waller pointed out. "We should not overreact to short-term fluctuations." He stressed that the Fed's primary task is to ensure long-term price stability while avoiding policy reversals.
Government Shutdown Drags Down Economic Momentum
Waller stated in his speech that if the government shutdown lasts too long, it will significantly impact fourth-quarter economic growth. He expects that a short-term shutdown will have limited effects on market confidence, but if it extends into the third week or beyond, slowed fiscal spending and public sector shutdowns will drag down GDP growth and may lead to a decline in consumer confidence.
"While the economy can recover quickly after reopening, a prolonged shutdown will have delayed effects on investment and employment," Waller warned. "This not only increases the uncertainty in policy-making but could also weaken the already fragile recovery foundation."
Diverging Signals in the Labor Market
Despite a recent rise in unemployment claims, the scale of corporate layoffs remains limited, indicating that the labor market has not yet entered a recession. However, Waller noted that stagnation in hiring in some industries and weakness in manufacturing are concerning.
He specifically mentioned that investments in artificial intelligence and automation are changing the structure of labor demand, with vacancies in some traditional positions decreasing while demand for high-skilled positions is rising, potentially causing structural distortions in employment data in the short term.
Market Interpretation: Expectations of Rate Cuts Strengthen
The market generally believes that Waller's statement further strengthened the expectation of a Fed rate cut in October. According to the CME "FedWatch" tool, traders currently estimate a 95% probability of a 25 basis point rate cut in October and an almost 80% probability of a cumulative 50 basis point cut by the end of the year.
Investors view Waller's cautious remarks as a signal of gradual easing by the Fed, rather than the endpoint of policy shifts. Analysts have pointed out that as the government shutdown continues and the trend of inflation decline becomes established, the Fed may continue to slightly lower rates at the next two meetings to stabilize economic growth.
Policy Pace May Be More Flexible
In his concluding remarks, Waller emphasized that the Federal Reserve needs to remain flexible and patient. He stated, "We must move forward amidst uncertainty and avoid hasty actions. Policy direction should be adjusted based on the actual performance of future data rather than speculative assumptions."
As economic data resumes publication and fiscal policy becomes clearer, the market will reevaluate the Fed's path. In the short term, a 25 basis point rate cut is almost certain, but the more important challenge is how the Fed maintains market confidence and policy coherence amid incomplete information.
