Fed's Waller sees rate cuts over next 3-6 months, starting in September

• Waller supports 25 bps cut at September meeting
• Anticipates additional rate cuts over next 3-6 months
• Sees labor market weakening, inflation stable

By Ann Saphir

Aug 28 (Reuters) - Federal Reserve Governor Christopher Waller on Thursday said he wants to start cutting U.S. interest rates next month and "fully expects" more rates cuts to follow to bring the Fed's policy rate closer to a neutral setting, stepping up his call to lower short-term borrowing costs.

"Based on what I know today, I would support a 25 basis point cut" at the upcoming September 16-17 meeting of the rate-setting Federal Open Market Committee, he told the Economic Club of Miami.

"While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly, and I think it is important that the FOMC not wait until such a deterioration is under way and risk falling behind the curve in setting appropriate monetary policy."

Waller said he did not think the Fed would need to cut rates more than a quarter point next month, though he said that view could change if the Labor Department's August jobs report, due out next Friday, points to a substantially weakening economy, and inflation remains well-contained.

However, he said "the time has come to ease monetary policy and move it to a more neutral stance," which he said was around 3%, some 1.25 to 1.50 percent points below the current policy rate range of 4.25%-4.50%.

"I don't believe that policy has fallen substantially behind the curve, but one way to signal that I don't intend to allow that happen is to talk about where we go after September," he said. "As I stand here today, I anticipate additional cuts over the next three to six months, and the pace of rate cuts will be driven by the incoming data."

Answering questions after his prepared speech, Waller said that means "it could be a sequence of cuts; it may be a couple, then you may want to pause...we know we want to head towards neutral; it's just a question how fast we get there."

Any upward price pressures from tariffs should peak by the end of this year or early next, he said.

"I fully expect more rates cuts as the labor market continues to soften; growth is probably still going to be slow in the second-half of the year," he said. "Because monetary policy tends to work with these kind of long lags, you don't want to wait."

Waller and Fed Governor Michelle Bowman both dissented on July 30 from the Fed's decision to keep short-term borrowing costs unchanged, citing their worries about the labor market weakening.

Both were appointed by U.S. President Donald Trump and are said to be under consideration as possible successors to Fed Chair Jerome Powell, whom Trump has been publicly pressuring to lower interest rates dramatically.

In another move widely seen as part of an effort to exert more control over the Fed, Trump earlier this week announced he was firing Fed Governor Lisa Cook over what he said was possible mortgage fraud, a move Cook says is illegal and is suing to stop.

The Fed did lower the policy rate by a full percentage point last year, starting in September before Trump was elected and continuing after his November election win. It has held rates steady this year, citing worries that Trump's higher tariffs could reignite inflation that is still running above the Fed's 2% goal.

Powell last week appeared sympathetic to some of Waller's reasoning, noting a sharp downturn in job growth to a monthly average of just 35,000 since May, even while the unemployment rate remains a low 4.2%.

Rising downside labor market risks, Powell said, may warrant "proceeding carefully" with a policy adjustment. Analysts and financial markets took those remarks as a strong indication that the Fed would cut rates in September and proceed gradually from there.

Waller on Tuesday cited analysis by Fed staff showing that, apart from the temporary effect of tariffs, inflation is running close to the Fed's 2% goal. That, along with well-anchored longer-term inflation expectations and rising chances of an undesirable weakening in the labor market, means he feels even more strongly than in July that the Fed should be cutting rates now.