Christopher J Waller: The case for cutting now

Speech by Mr Christopher J Waller, Member of the Board of Governors of the Federal Reserve System, at the Money Marketeers of New York University, New York City, 17 July 2025.

The views expressed in this speech are those of the speaker and not the view of the BIS.

Thank you, John, and thank you for the invitation to speak to you today.

My purpose this evening is to explain why I believe that the Federal Open Market Committee (FOMC) should reduce our policy rate by 25 basis points at our next meeting. I used to tell my junior research colleagues that presentations are not murder mysteries-just tell the audience up front "who did it" by telling them the main point. So let me follow my own advice and state up front the reasons I believe we should cut the policy rate at our meeting in two weeks.

First, tariffs are one-off increases in the price level and do not cause inflation beyond a temporary surge. Standard central banking practice is to "look through" such price-level effects as long as inflation expectations are anchored, which they are.

Second, a host of data argues that monetary policy should be close to neutral, not restrictive. Real gross domestic product (GDP) growth was likely around 1 percent in the first half of this year and is expected to remain soft for the rest of 2025, much lower than the median of FOMC participants' estimates of longer-run GDP growth. Meanwhile, the unemployment rate is 4.1 percent, near the Committee's longer-run estimate, and headline inflation is close to our target at just slightly above 2 percent if we put aside tariff effects that I believe will be temporary. Taken together, the data imply the policy rate should be around neutral, which the median of FOMC participants estimates is 3 percent, and not where we are-1.25 to 1.50 percentage points above 3 percent.