Waller says Fed policy still in restrictive territory, sees room to cut rates

By Michael S. Derby

NEW YORK, Dec 17 (Reuters) - Federal Reserve Governor Christopher Waller said on Wednesday the U.S. central bank still has room to cut interest rates amid rising job market weakness.

"I still think we're probably, you know, maybe we're 50 to 100 basis points off of neutral," which means the Fed still has room to cut interest rates if it needs to, Waller said at the Yale School of Management CEO Summit in New York.

Given the outlook, "there's no rush to get down" on interest rates, Waller said, and "we just can steadily kind of bring the policy rate down towards neutral."

The job market is not showing dramatic declines, but it is continuing to "soften," Waller said, so when it comes to further interest rate cuts, "we can go at a moderate pace, I don't think we have to do anything dramatic."

Waller's comments at the event were his first public remarks since the Fed last week cut its benchmark interest rate by a quarter of a percentage point to the 3.50%-3.75% range, as it sought to balance rising risks to the job market against an environment where inflation is still well above its 2% target.

There's an active debate among market participants and central bankers as to whether the Fed should cut interest rates again at its late January policy meeting. Waller, although he said the likely path for monetary policy remains toward lower rates, did not say anything about the timing of another rate cut.

Waller's view that monetary policy is still exerting restraint on the economy stands in contrast to the view of Fed Chair Jerome Powell. The Fed leader said after the meeting that rate cuts done since September put monetary policy "within a range of plausible estimates of neutral," in comments that declined to tip his hand about the prospect of another rate cut.

The Fed's decision was fractured, with two policymakers arguing that the Fed should hold borrowing costs steady, while one wanted a bigger cut than most officials favored.

EARLY DOVE

Waller, who voted with his colleagues in favor of a rate cut, has been one of the Fed's most steadfast advocates for easier monetary policy, arguing that the Trump administration's tariffs would not drive persistent inflation pressures at a time when job market risks have been rising.

Waller, who is on the short list of possible successors to Fed Chair Jerome Powell next year, said new data bolsters his view that supporting the labor market should be the focus of U.S. monetary policy.

"We're close to zero job growth" and "that's not a healthy labor market," he said.

Waller said the Fed's string of rate cuts in the final four months of 2025 have helped offset some of the risks to hiring, and the prospect of a stronger economy next year on fiscal policy changes and less uncertainty should also help hiring.

"The critical thing for me is the employment leg of our dual mandate, and inflation will come back down," he said.

In his remarks, Waller also said that the Fed's decision at the FOMC meeting to start buying a large amount of Treasury bills to manage market liquidity needs is not a form of stimulus. The Fed said it will buy the short-dated Treasuries in aggressive amounts for a few months ahead of April's tax date, after which it will likely reduce the pace.

"This is just a temporary adjustment to get reserves up to protect against taxes. It's not QE," Waller said, in reference to stimulative bond buying referred to as quantitative easing.