Federal Reserve Governor Christopher Waller said last Friday (March 20) that he remains cautious about the current economic situation, but still believes there is an opportunity for an interest rate cut later this year.

Waller, who had previously supported interest rate cuts, said that recent developments in the labor market and the uncertainty surrounding the war with Iran necessitate a more conservative approach. He stated, "This doesn't mean I'll remain on hold for the rest of the year; I simply want to wait and see. If things develop relatively well and the labor market continues to be weak, I will again advocate for a policy rate cut later this year."

The market has now almost completely ruled out the possibility of significant rate cuts for the remainder of 2026 and even 2027, a stark contrast to pre-war expectations when traders widely anticipated two or three rate cuts this year. However, soaring oil prices and uncertainty surrounding the duration of the war have fundamentally altered market expectations and prompted Waller and other policymakers to reassess their positions.



Waller had voted against a rate cut at the Federal Open Market Committee (FOMC) meeting in January, but at a meeting earlier last week, he chose to follow the majority and keep rates unchanged.

The weak labor market remains a core concern, but the risk of inflation from the war should be closely watched.

Waller's earlier dovish stance stemmed primarily from a clearly weakening labor market, with virtually no net job growth projected for 2025. However, last Friday he pointed out that the labor force participation rate also failed to expand, thus "net zero" growth kept the unemployment rate stable, even with a 92,000 drop in nonfarm payrolls in February. He said, "If the next jobs report shows another 90,000 decline, that would be four negative reports out of five. To me, that's not zero growth. That's when we need to seriously consider the poor state of the labor market."
Waller added, "I don't think this war will be of any positive help in the future, but we have to see how inflation evolves."

Currently, Waller holds a relatively optimistic view of overall inflation. He believes that tariffs have a one-off effect, and that overall inflation is structurally trending towards the Fed's 2% target. He said, "If these tariff effects haven't subsided by the second half of the year and inflation starts to rise, then we'll be in a tricky situation: should we worry about inflation and risk a recession, or not?"

Waller said, "I will be closely watching the future performance of the labor market to decide whether to begin advocating for rate cuts at subsequent meetings, while also observing inflation trends."

Bowman adopts a more aggressive stance on interest rate cuts: expects three rate cuts this year.

Earlier that day, Michelle Bowman, another Federal Reserve governor nominated by President Trump, said in an interview that she believes the Fed can cut interest rates three times this year. This would bring the benchmark federal funds rate below what FOMC officials consider a neutral level—neither stimulating nor inhibiting economic growth.

Bowman maintained this position in the interview, although she expects "strong economic growth this year" and "supported by the current administration's supply-side policies."

According to the Fed's "dot plot" updated last Wednesday, a total of 19 policymakers participated, of whom only three (including Bowman) expect significant rate cuts this year, indicating that she belongs to a relatively dovish camp on monetary policy.

War uncertainty drives Federal Reserve policy toward caution

The energy shock and high oil prices triggered by the Iraq War have become the biggest uncertainty for the Federal Reserve's current decision-making. Waller's remarks reflect the Fed's attempt to balance between a weak labor market and the potential for persistent inflation.

Market expectations have been significantly adjusted, and the probability of a rate cut in the short term is close to zero. However, if the labor market deteriorates further and inflation does not show obvious signs of spiraling out of control, the window for a rate cut later this year may still reopen.

The Fed’s next move will depend heavily on employment data, the path of inflation, and the evolution of the conflict in the Middle East.