Fed’s Waller Doubles Down on July Rate Cut: ‘It’s Not Political’

Federal Reserve governor Christopher Waller. (Al Drago/Bloomberg)

Federal Reserve governor Christopher Waller said Thursday that the central bank should consider cutting interest rates at its July meeting, even after a strong June jobs report.

Inflation has come down far enough to justify a move—and tariffs should necessarily not be a reason to delay, he said.

“I just made the argument that I think we’re too tight, and we could consider cutting the policy rate in July,” Waller said during a question-and-answer session following his speech at the Dallas Federal Reserve Bank.

Waller explained that the Fed’s current policy rate is still well above where many officials believe it needs to be in the long run. Inflation has cooled, the job market is steady, and recent tariff-driven price increases are limited to select goods, he said.

If inflation is coming down, you don’t need to be as restrictive anymore, Waller said. “That’s good central banking,” he added.

The Fed has held interest rates steady since December 2024, holding its benchmark rate between 5.25-5.50%. Fed Chair Jerome Powell and other officials have signaled a wait-and-see approach, citing uncertainty from new tariffs. Most have indicated they don’t expect to make any policy changes until at least September. At the central bank’s last meeting, the so-called dot plot showed growing divisions within the committee. Some policymakers projected two rate cuts this year, while others penciled in none at all. Investors are pricing in just a 6.7% chance of a rate cut in July, according to the CME FedWatch tool.

Waller’s comments stand out not only for their timing—just days after the latest employment data showed continued strength in the labor market—but also because of speculation that he could be named as the next Fed chair.

President Donald Trump has repeatedly criticized Powell and has urged him to resign before his term ends in May 2026. Waller has emerged as a possible successor, in part because of his dovish stance on interest rates. But on Thursday, he said that his policy views are driven by economics, not politics.

“That’s my view. I’m kind of in the minority on this, but I’ve tried to lay out very clearly, in economics terms, why we could do this. It’s not political,” he said.

Waller has previously advocated for cutting interest rates in July, along with the Fed’s vice chair for supervision, Michelle Bowman.

In his prepared remarks earlier in the day, Waller focused on the Fed’s $6.7 trillion balance sheet. He said the central bank should not only keep shrinking its holdings, but also start changing what it owns, moving away from long-term bonds and mortgage-backed securities in favor of short-term Treasury bills.

“If the Fed moved forward with a maturity-matching strategy as I suggest, it would hold about half of its Treasury securities in shorter-dated bills,” he said. “We are reducing the size of the balance sheet slowly and need to consider shifting it toward more bills.”

Waller said long-term assets expose the Fed to interest rate risk and don’t match up well with the short-term liabilities it manages. A shift toward shorter-term securities, he argued, would make the balance sheet safer and more flexible.

The Fed’s balance sheet peaked at nearly $9 trillion in 2022 after years of asset purchases during the pandemic and earlier crises. Waller estimates that it could safely shrink to about $5.8 trillion.

He also pushed back on criticism that the Fed wastes taxpayer money by paying interest to banks that hold reserves. Waller said those payments are simply passing along Treasury interest and don’t create additional costs.

Waller’s balance sheet view also aligns with Trump’s fiscal preferences. The White House has reportedly been discussing a return to short-term Treasury borrowing to keep government interest costs down—another reason Waller’s public comments are being watched more closely.

Waller said the Fed could make these changes gradually and predictably, without causing disruption in financial markets.

Write to Nicole Goodkind at nicole.goodkind@barrons.com.