By Lina Irawan 
Waller’s cautious stance stems directly from the robust January jobs report, which significantly surpassed economists’ forecasts. Employers added a more-than-expected 130,000 jobs, a figure that, if sustained, suggests a labor market considerably stronger than previously anticipated. This strength complicates the Fed’s calculus, as a rapidly cooling job market had been one of the primary justifications for impending rate reductions. However, Waller tempered this optimism by acknowledging that last month’s pickup in hiring could have been a one-time gain, potentially influenced by seasonal adjustments or other transient factors. He stressed the need for further confirmation, stating he would require a similarly positive report next month – referring to the upcoming February jobs data – to definitively conclude that the job market is indeed improving. This conditional assessment highlights the Fed’s deep dive into labor market metrics beyond just the headline job creation numbers, scrutinizing revisions, wage growth, labor force participation, and unemployment rates to form a comprehensive view.
This hedging from Waller represents a notable shift from his position in January, when he was one of the two Fed governors to dissent against the central bank’s decision to hold its key rate steady after three consecutive rate cuts at the end of last year. His previous dissent was rooted in a desire for tighter monetary conditions, reflecting concerns that inflation might prove more persistent than others on the FOMC believed, or that the economy was still running too hot. The decision to maintain the federal funds rate at its then-current target range, which left the Fed’s short-term rate at about 3.6%, marked a pause in a period of aggressive tightening. The Fed had embarked on a series of historic rate hikes starting in early 2022 to combat surging inflation, bringing the benchmark rate from near zero to its multi-decade high. The subsequent three rate cuts late last year, following a period of disinflationary trends, were widely interpreted as the Fed signaling a pivot towards easing monetary policy. Waller’s current contemplation of skipping a cut, despite his earlier hawkish leanings, illustrates the genuine uncertainty within the Fed about the optimal path forward and the conflicting signals emanating from the economy.
The implications of the Fed’s interest rate decisions are far-reaching, directly impacting the financial lives of millions of Americans and the operational costs of businesses. When the Fed reduces its rate, over time it can lead to cheaper borrowing for a wide array of financial products. This includes mortgages, making homeownership more accessible or refinancing more attractive; auto loans, potentially boosting car sales; and business loans, encouraging investment, expansion, and hiring. These rates, while influenced by the Fed’s actions, are also shaped by broader financial markets, investor sentiment, and global economic conditions. A delay in rate cuts, therefore, would mean that consumers and businesses continue to face higher borrowing costs for a longer period, potentially dampening demand and economic activity. Conversely, maintaining higher rates for longer helps to ensure that inflationary pressures remain subdued, aligning with the Fed’s dual mandate of achieving maximum employment and stable prices.
Beyond the labor market and monetary policy, Waller also weighed in on another significant economic development: the Supreme Court’s decision to strike down many of Trump’s tariffs. These tariffs, initially imposed under the Trump administration, primarily targeted imports from China and certain steel and aluminum products from other countries, citing national security concerns or unfair trade practices. The Supreme Court’s ruling, which likely centered on the legal authority of the executive branch to impose such sweeping tariffs without clear congressional approval, was a notable blow to the former president’s trade policy framework. Waller suggested that this ruling would likely have only a limited impact on the broader economy and inflation, and therefore wouldn’t significantly affect his view on interest rates. He acknowledged that the ruling could have “a positive impact on spending and investment” by reducing the cost of imported goods for businesses and consumers, but quickly added that “how large the impact may be and how long it could last is unclear.” This cautious assessment reflects the complex interplay of trade policy with domestic economic conditions, where the benefits of lower import costs might be partially offset by other factors or take time to materialize. Adding another layer of complexity, Waller noted that the White House is seeking to reimpose the tariffs using other legal avenues, creating “considerable uncertainty over to what extent tariffs will continue.” This ongoing legal and political wrangling means that businesses cannot fully rely on the Supreme Court’s decision to guide their supply chain and investment strategies, diminishing the potential positive economic impact.
Waller’s overall assessment of the near-term monetary policy path was characterized by a distinct sense of equipoise. He outlined two primary scenarios for the upcoming March FOMC meeting: "If February’s jobs report is similar to last month’s, indicating that downside risks to the labor market have diminished, it may be appropriate to keep the Fed’s short-term rate at current levels and watch for continued progress on inflation and strength in the labor market," Waller stated in his remarks. This scenario emphasizes the Fed’s commitment to ensuring inflation is firmly on track to its 2% target, even if it means tolerating a strong labor market for longer. "But if the good labor market news of January is revised away or evaporates in February," he continued, "a cut should be made at the March meeting." This alternative underscores the Fed’s readiness to respond swiftly if economic data signals a significant weakening, which would necessitate an easing of financial conditions to support growth. Reflecting the genuine ambiguity, Waller concluded, "As things stand today, I rate these two possible outcomes as close to a coin flip." This "coin flip" assessment is highly significant, as it signals that the market’s previous strong conviction in a March rate cut might be premature, forcing investors to re-evaluate their positions.
A deeper economic conundrum also occupied Waller’s attention: the perplexing divergence between relatively solid economic growth and stagnant, or even declining, job creation over the past year. Waller acknowledged that growth is relatively solid, yet employers added few, if any, jobs last year. He expressed skepticism even about the meager gains reported earlier this month for last year, predicting they would eventually be revised to below zero. "This would be the first time in my career, my life, that I saw an economy growing like this, and zero job growth," Waller remarked, highlighting the unusual nature of the current economic environment. "I don’t even know quite how to think about this." This sentiment reflects a broader bewilderment among many economists trying to reconcile robust GDP figures with a seemingly quiescent labor market. He added that hiring could pick up this year and largely resolve the contradiction, suggesting that the recent sluggishness might be a temporary anomaly or a lag in data reporting.
Another prominent explanation for this growth-without-jobs phenomenon, which Waller also noted, could be higher productivity. The pandemic forced many businesses to innovate and optimize their operations, leading to significant efficiency gains. Companies learned to produce more with fewer workers, investing in technology, automation, and streamlined processes. This "productivity boom" allows the economy to expand without necessarily requiring a commensurate increase in employment. While higher productivity is generally a positive long-term trend, indicating a more efficient economy, it can create short-term challenges in job creation and exacerbate concerns about technological displacement. If businesses can meet growing demand with their existing workforce or even a smaller one, the impetus for widespread hiring diminishes, creating the very "zero job growth" scenario that Waller finds so perplexing.
Meanwhile, the Federal Reserve’s delicate balancing act continues to be a magnet for political criticism, particularly from former President Donald Trump. Trump attacked the Fed on Friday after the government reported that the economy grew more slowly in the final three months of last year than in the summer and fall. Growth slowed to an annual rate of 1.4% in the fourth quarter, a notable deceleration from the robust 4.4% experienced in the third quarter. This slowdown, while still positive, provided fresh ammunition for Trump, who has consistently advocated for lower interest rates to stimulate the economy. "LOWER INTEREST RATES," Trump posted on social media, adding a scathing critique of the current Fed Chair: "‘Two Late’ Powell is the WORST!!" Trump, known for his direct and often confrontational style, has frequently targeted Jerome Powell, whom he appointed, for not cutting rates more aggressively during his presidency. His repeated misspelling of Powell’s usual nickname, "Too Late," underscores his frustration with what he perceives as the Fed’s overly cautious and detrimental monetary policy. These political attacks, while commonplace during Trump’s previous term, underscore the intense pressure the Fed faces, even as it strives to maintain its independence and make decisions based solely on economic data and its dual mandate. The Fed’s continued independence from political influence is widely regarded as crucial for its credibility and effectiveness in managing the nation’s monetary policy.
As the economy navigates these complex currents, all eyes will be on the upcoming February jobs report. Waller’s "coin flip" assessment means that this data release will be an even more critical determinant for the Fed’s March meeting, potentially dictating whether the central bank begins its long-anticipated rate-cutting cycle or holds firm, continuing its vigilant watch over inflation and employment. The interplay of robust job gains, perplexing growth-without-jobs dynamics, and persistent political pressure creates an environment of profound uncertainty for monetary policy makers and financial markets alike.