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US borrowing costs should be as much as a percentage point lower, according to Federal Reserve governor Christopher Waller, ahead of an interview with President Donald Trump to be the next chair of the country’s central bank.
Waller, a top Fed official and the leading internal candidate to lead the central bank, warned that American jobs growth was now “close to zero” and said interest rates should be lowered “at a moderate pace” next year to support a waning labour market.
“We’re close to zero jobs growth — now that’s not a healthy labour market,” he told the Yale CEO Summit on Wednesday.
“I still think we’re probably . . . 50 to 100 basis points off of neutral,” Waller said, referring to the level of interest rates that neither boosts nor throttles economic growth. “We’ve still got some room, we could bring things down.”
Waller’s comments came ahead of an interview with the US president on Wednesday afternoon for the position of Fed chair, replacing Jay Powell, whose term ends in May. Trump has aggressively advocated for lower rates in recent months, lashing out at Powell for failing to act quickly enough.
The Fed has cut rates three times this year to a three-year low range of 3.5 to 3.75 per cent. But policymakers have been divided over the reductions as they debate whether to prioritise risks to inflation or the labour market.
Waller has been a strong proponent of rate cuts, arguing that the need to take action to support a flagging labour market outweighed any risks to inflation. “I don’t see any evidence whatsoever that inflation expectations are taking off,” he said on Wednesday.
Hiring has cooled sharply in recent months, with an official report on Tuesday showing the unemployment rate hit a four-year high in November. Just 64,000 posts were added last month, according to the Bureau of Labor Statistics, a figure the Fed believes could be as much as 60,000 lower in reality.
“We’re not seeing a dramatic decline and a labour market going off a cliff: it’s just continuing to just soften and soften,” Waller said. “So we can go at a moderate pace. I don’t think we have to do anything dramatic.”
Other members of the Fed board have been more circumspect about the need for further cuts. Powell said last week that borrowing costs were “now within a broad range of estimates of its neutral value”.
Waller is the preferred candidate among economists and Fed staff to replace Powell. His odds have risen since his interview with the president was confirmed this week, becoming the second favourite in betting markets behind National Economic Council director Kevin Hassett and ahead of former Fed governor Kevin Warsh.
Hassett, the frontrunner, has stoked concerns on Wall Street about Fed independence because of his close relationship with the president. He said on Tuesday that if Trump had a good idea on economic policy, he would pass it on to the central bank’s rate-setting board.
But on Wednesday, Scott Bessent, the US Treasury secretary, dismissed concerns about Hassett’s fitness for the job.
“I think any concern on Director Hassett is absurd,” Bessent said. “He is an eminently qualified PhD economist with deep views of his own, and he, along with the others, would make a very good Fed chair.”
Waller said on Wednesday that he would “absolutely” emphasise the importance of Fed independence to the president but added that there were appropriate channels of communication between the White House and the Fed.
He said the Fed chair and Treasury secretary had a breakfast meeting every two weeks. “That’s a normal chain of communication where information can be passed from the White House to the chair about what the administration’s views are.”
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