On Monday, a highly influential official of the Federal Reserve - Federal Reserve Governor Waller stated that future rate cuts need to be "more cautious." Waller implied that the magnitude of future rate cuts will be less than the substantial cut in September.

The reason for the need to be "more cautious" in future rate cuts is that Waller is concerned that the U.S. economy may still operate at a pace higher than expected. Waller cited recent reports on employment, inflation, GDP, and income, pointing out that the data shows the economy may not be slowing down as expected, and the economy is much stronger than previously thought, with little indication of a significant slowdown in economic activity.

In his prepared remarks at the Stanford University conference, Waller said:

Although we do not want to overreact to these data or ignore them, I believe that the overall data suggests that monetary policy should be more cautious on the issue of the speed of rate cuts, rather than advancing rapidly as it did at the September meeting.

Regardless of what happens in the near term, my basic view remains that policy rates should be gradually reduced next year.

Waller stated that current economic data allows the Federal Reserve to cut rates at an "appropriate pace" until a neutral interest rate is achieved. As long as interest rates are above the neutral level, it means that the Federal Reserve has a considerable room for rate cuts.

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Waller stated that the U.S. job market has slowed down but remains quite healthy. However, he expects that due to the impact of hurricanes and strikes, the U.S. may lose 100,000 non-farm jobs in October.Here is the translation of the provided text into English:

**Full Text of Waller's Speech on Monday:**

I would like to take a few minutes to share my views on the economic outlook and its implications for monetary policy. So I will start here and then discuss the role of policy rules in my decision-making process and the discussions at the Federal Open Market Committee (FOMC).

Since the last FOMC meeting about three weeks ago, the data we have received have been mixed, as they have at times over the past year. I still believe that the U.S. economy is on a solid foundation, with the unemployment rate close to the FOMC's maximum employment target and inflation near our target, despite recent disappointing inflation data.

In the first half of 2024, real gross domestic product (GDP) grew at an annual rate of 2.2%, and I expect the growth rate in the third quarter to be slightly faster. The blue-chip consensus forecast of private sector forecasters is 2.3%, while the Atlanta Fed's GDPNow model, based on the latest data, predicts a real increase of 3.2%.

Previously, there were concerns that GDP for the first half of this year may have overstated the strength of the economy, as the estimated gross domestic income (GDI) grew by only 1.3%, suggesting that GDP could be significantly revised downward. However, the revised data received after our recent FOMC meeting indicate the opposite—GDI growth was significantly revised up to 3.2%. This change, in turn, also led to an increase in the second quarter's personal savings rate by about 2 percentage points, reaching 5.2% in June. This revision indicates that households are in good shape for future consumption, although data and anecdotes suggest that lower-income groups are facing difficulties. These revisions indicate that the economy is stronger than previously thought, with little indication that economic activity will slow down significantly.

This outlook is supported by strong consumer spending, which remains robust. Although the growth of personal consumption expenditures (PCE) has slowed since the second half of 2023, it has still grown at an average rate of nearly 2.5% so far this year. In addition, my business contacts believe that there is a significant pent-up demand for durable consumer goods, home renovations, and other large purchases, which has been suppressed by high interest rates on credit cards and mortgages. Now, as interest rates begin to decline and are expected to fall further, consumers will be eager to make these purchases. In terms of business spending, purchasing managers in the manufacturing sector described continued weakness in the industry, but the vast majority of purchasing managers outside of manufacturing still reported robust expansion in activity.

Now let's talk about the labor market. A few months ago, the labor market seemed to be cooling off too quickly. The number of new jobs added was low, and the unemployment rate rose from 4.1% in June to 4.3% in July, increasing the risk of a worsening labor market. To remind everyone how bad the July data were, some Fed watchers even called for an emergency FOMC meeting to discuss rate cuts. Although the unemployment rate fell slightly in August, job growth was once again far below expectations. Many believed that the labor market was on the verge of serious deterioration, and despite the policy rate being lowered by 50 basis points at the September FOMC meeting, the Fed was still not responding in time.

Then, we received the September employment report. The addition of jobs in September was surprisingly strong, reaching 254,000, and the unemployment rate fell back to 4.1%, the same level as in June. The report also showed that the job growth data for the previous two months were significantly revised upward. Taken together, the message is very clear: despite a slowdown in job additions over the past year and an increase in the unemployment rate, the labor market remains very healthy.

Combined with other new labor market data, the evidence suggests that the supply and demand for labor have become more balanced. The number of job vacancies—a sign of the strength of the labor market—has gradually decreased since the beginning of the year. The ratio of job vacancies to the unemployed is 1.2, comparable to the 2019 level, when the labor market was quite strong. To illustrate the importance of this number, recent research shows that this ratio has only exceeded 1 three times since 1960. Another indicator of the strength of the labor market—the quit rate—has declined compared to 2019, partly reflecting a decrease in hiring rates as the supply and demand for labor become more balanced.

In summary, based on job positions, unemployment rate, and employment data revisions, the growth of labor demand relative to supply has slowed, but has not deteriorated. The stability of these indicators has strengthened my confidence in further progress towards the FOMC's inflation target, while supporting a healthy labor market, increasing employment, and improving workers' wages and living standards.In the weeks and months ahead, I will be looking for more evidence to support this outlook. Unfortunately, interpreting the October employment report, which will be released before the next FOMC meeting, will not be so straightforward. This report is likely to show a significant but temporary loss of jobs due to two recent hurricanes and the Boeing strike. I anticipate that these factors could reduce job growth by over 100,000 this month, potentially having a slight impact on the unemployment rate, but it is uncertain whether it will be very noticeable. Since the release of the employment report coincides with the regular blackout period when policymakers are not allowed to comment on the economy, you will not hear any Federal Reserve official interpreting this weak data, but I hope others will provide an explanation.

Looking ahead, I expect job growth to slow from its current pace but remain robust. The unemployment rate may tick up slightly, but it is likely to remain at historically low levels. Although I believe the labor market is fundamentally solid, I will continue to monitor all data for signs of weakness.

Meanwhile, after inflation has significantly approached the FOMC's 2% target in the past few months, it has risen in September. The Consumer Price Index (CPI) grew by 0.2% over the past month, 2.1% over the past three months, 1.6% over the past six months, and 2.4% over the past year. Oil prices fell for most of the summer but have recently surged significantly. Excluding energy and more volatile food prices, core CPI inflation was the same as in August, recording a 0.3% increase in September, and a 3.3% increase over the past year.

Private sector forecasts for PCE inflation—the FOMC's preferred indicator—will also rise in September. The core PCE price is expected to have risen by about 0.25% last month. While this is not a welcome phenomenon, if the monthly core PCE inflation rate remains at this level, the annualized rate over the past five months is still close to 2%. We have made significant progress in curbing inflation over the past year and a half, but this progress is clearly uneven—at times it feels like a roller coaster. Whether this month's inflation data is just noise or a harbinger of a sustained rise in inflation remains to be seen. I will be closely monitoring the data to see if this recent increase is persistent.

The FOMC's inflation target is an average of 2% over the long term, and there are some reasons to suggest that future price increases may be moderate. I have heard businesses report that their pricing power seems to have weakened as consumers become more sensitive to price changes. Growth in labor compensation is also continuing to slow. Indeed, the average hourly wage growth in September reached 4%, and it seems that a 4% annual wage increase would exert upward pressure on inflation close to 2%, but this may not be the case when considering productivity. Over the past five quarters, productivity has grown at an average annual rate of 2.9%. While some of this growth is to make up for the decline in productivity due to the pandemic, the longer this growth continues—the second quarter grew by 2.5%—the more productivity can support wage growth of 4% or higher without driving up inflation. Nevertheless, I will continue to closely monitor all data related to inflation.

The labor market is essentially balanced, employment is close to its maximum level, and inflation has generally been close to our target over the past few months. As a decision-maker, I want to do everything I can to keep the economy on this track. For me, the core issue is how and how quickly to lower the federal funds rate target, which I believe is currently at a tightening level. To answer such questions, I often look at various monetary policy rules to assess the appropriate setting of policy. Policy rules have long been a serious topic of interest for the Shadow Open Market Committee. Therefore, before I turn to my views on the future policy path, I would like to discuss monetary policy rules and discretion, and briefly introduce the history of the use of rules in the FOMC.

As guided, I reviewed Chapter 2 of George Kahn's book "The Taylor Rule and the Transformation of Monetary Policy" and consulted memoirs of senior members of the Federal Open Market Committee. The rules emerged in the 1990s when the Federal Reserve gradually moved away from monetary targets, focused more on interest rate policy, and began to take significant steps to increase transparency. Federal Reserve staff immediately took an interest in Taylor-type rules and even made some research contributions. In 1995, a report on the rules was made to the FOMC, and that same year, Janet Yellen, John Taylor's Bay Area colleague, seems to have been the first policymaker to mention the Taylor rule at an FOMC meeting. During Alan Greenspan's tenure as chairman, FOMC decisions often mimicked the Taylor rule, but he was known for advocating a communication style of "constructive ambiguity," and he and subsequent Federal Reserve chairs have always opposed handing over decisions to strict rules. Today, of course, before each FOMC meeting, policymakers receive materials that include rule-based analysis, and we also publish policy recommendations based on different rules in the Monetary Policy Report. Rules have become a part of modern policy-making.

As everyone here knows, but for the benefit of other listeners, I explain that the Taylor rule links the level of the policy interest rate to a limited number of other economic variables, most commonly the degree to which inflation deviates from the target and the utilization of resources relative to some long-term trend in the economy. There are many forms of the Taylor rule, but they are generally divided into two categories.

One of them is the inertia rule, characterized by the policy interest rate changing only slowly. I tend to view it as a reflection of how policymakers react in a stable economy, changing when the forces of change in the economy and policy gradually accumulate. When changes do occur, gradual reactions may give policymakers time to assess the true state of the economy and the potential impact of their decisions. An example is the second half of 2023, when policymakers showed firmness when inflation fell faster than widely expected, and the FOMC did not change its policy direction when inflation briefly rose at the beginning of 2024, a practice validated by the inertia rule.

On the other hand, non-inertia rules allow and even require rapid policy adjustments. Guidance from such rules is more useful at economic turning points when policymakers need to get ahead of developments. We saw these non-inertia rules suggest in 2021 that the policy interest rate should rise more quickly from the effective lower bound as inflation began to exceed the FOMC's 2% target. Non-inertia rules are also more useful in the face of major economic shocks such as the 2008 financial crisis and the pandemic outbreak.The greatest advantage of rules is that they provide a simple and reliable guide for policy, but what should be done when different rules recommend different policy actions under the same economic conditions? Currently, inertial rules suggest that we should slowly lower the policy interest rate to a neutral level that neither restricts nor stimulates the economy. In contrast, non-inertial rules advise us to cut the policy interest rate more aggressively, provided that we are certain of the values of all "*” variables: U*, Y, and r. I believe the answer is that while rules are valuable in analyzing policy options, they have limitations. These include a narrower range of data considered compared to what policymakers use for decision-making, and the fact that simple policy rules do not take into account risk management, which is often a critical consideration in policy decisions. Therefore, although policy rules are a good check on discretionary policy, sometimes discretion is needed. Hence, I prefer to view them as "policy rules of thumb."

Speaking of my views on the policy path, let me discuss three scenarios I have considered to manage risks in medium-term decision-making.

The first scenario is that the overall strong economic development described today continues, with inflation close to the FOMC's target and unemployment rates rising only slightly. This scenario suggests to me that we can adjust policy to a neutral stance at a steady pace. This path is based on a judgment of the balanced risks to our dual mandate. In this case, our task is to keep inflation near 2% without unnecessarily slowing down the economy.

Another scenario is that, despite recent data suggesting this possibility is low, inflation significantly falls below 2% for a period, and/or the labor market deteriorates markedly. This signal indicates a decline in demand, and the FOMC may suddenly be behind the curve, implying the need to achieve a neutral level more quickly through preemptive cuts in the policy interest rate.

The third scenario applies if inflation unexpectedly intensifies, possibly due to demand or wage pressures being stronger than anticipated, or some supply shock causing inflation to rise. As we learned from the recovery from the pandemic recession, such surprises can indeed occur when demand is stronger than expected and supply is weaker than expected. In this case, as long as the labor market does not deteriorate, we can pause rate cuts until progress is made and uncertainty is reduced.

Recently, we have seen upward revisions in GDI, an increase in job vacancies, high GDP growth forecasts, strong employment reports, and higher-than-expected CPI reports. These data suggest that the economy may not be slowing down as much as we would like. While we do not want to overreact to these data or ignore them, I believe the overall data indicate that monetary policy should be more cautious in the pace of rate cuts than it was at the September meeting. I will closely monitor inflation, labor market, and economic activity data released before the next meeting to see if these data confirm or overturn my inclination to slow the pace of monetary policy easing.

Regardless of what happens in the near term, my base expectation is still for a gradual reduction in policy interest rates next year. The median forecast of FOMC participants is a rate of 3.4% by the end of 2025, so most colleagues also expect a gradual reduction in policy accommodation next year. As for the ultimate policy goal, it is uncertain. The long-term median estimate for the federal funds rate in the Committee's Summary of Economic Projections (SEP) is 2.9%, but the distribution is broad, ranging from 2.4% to 3.8%. While there is more focus on the magnitude of rate cuts in the next few meetings, I believe the bigger message conveyed by the SEP is that there is still a considerable amount of policy accommodation, which will be gradually realized if the economy continues to perform as well as it currently is.

Thank you again for allowing me the opportunity to participate in today's meeting and to share some thoughts related to monetary policy rules and my daily work in Washington. The Shadow Committee has elevated the public debate on monetary policy. I hope you can continue to play this role for many years to come.

Chair of the Minneapolis Federal Reserve: Further moderate rate cuts may be appropriate.On the same day, Neel Kashkari, President of the Federal Reserve Bank of Minneapolis and a voting member of the FOMC for 2026, stated that it may be appropriate for the Federal Reserve to further gently lower interest rates in the coming quarters.

Kashkari indicated that, ultimately, the future direction of Federal Reserve policy will be determined by actual economic, inflation, and labor market data. Although Kashkari described the Federal Reserve's current policy stance as restrictive, he noted that the degree of restrictiveness is not yet clear.

Kashkari pointed out that the U.S. labor market remains strong, and the recent employment report is encouraging, suggesting that a rapid weakening of the labor market does not seem to be imminent. In addition, Kashkari stated that the inflation rate has fallen significantly from its peak but remains slightly above the Federal Reserve's target.

Kashkari previously expressed satisfaction with the Federal Reserve's 50 basis point rate cut in September, and he suggested that a "reasonable starting point" would be for the Federal Reserve to cut rates by a quarter of a percentage point at each of the remaining two meetings this year.

Kashkari also mentioned that if the U.S. debt continues to swell, the neutral interest rate will also rise.

Market expectations for rate cuts have already receded.

The Federal Reserve made a significant 50 basis point rate cut at its September meeting. Such a substantial rate cut has traditionally only been done during crisis periods, with the Federal Reserve usually preferring to cut rates at a pace of 25 basis points.According to the dot plot estimates released last month, Federal Reserve policymakers anticipate a total of an additional half percentage point rate cut for the remainder of 2024, with an expected cumulative reduction of 100 basis points in 2025.

The U.S. September CPI inflation indicator came in higher than expected, coupled with the latest data from the U.S. labor market showing a decrease in the unemployment rate against a backdrop of strong employment. These figures have led investors to retract their expectations for a significant rate cut by the Federal Reserve in the near future. Currently, the bond market is pricing in a rate cut of only 45 basis points by the Federal Reserve within the year, while the options market is betting on just one more rate cut within the year, or even a pause in rate cuts after a 25 basis point reduction this year until early next year.