Fed's Waller still sees 'no rush' to cut rates amid sticky inflation data

By Michael S. Derby

NEW YORK (Reuters) -Recent disappointing inflation data affirms the case for the U.S. Federal Reserve to hold off on cutting its short-term interest rate target, Fed Governor Christopher Waller said on Wednesday, but he did not rule out trimming rates later in the year.

"There is no rush to cut the policy rate" right now, Waller said in a speech at an Economic Club of New York gathering. Recent data "tells me that it is prudent to hold this rate at its current restrictive stance perhaps for longer than previously thought to help keep inflation on a sustainable trajectory toward 2%."

Rate cuts are not off the table, however, Waller said, noting that further progress expected on lowering inflation "will make it appropriate" for the Fed "to begin reducing the target range for the federal funds rate this year."

It could take a few months of easing inflation data to gain that confidence, but until then, a strong economy gives the Fed space to take stock of how the economy is performing, Waller said.

Pushing back the start of rate cuts will likely affect how much easing happens this year, he said. "It is appropriate to reduce the overall number of rate cuts or push them further into the future in response to the recent data."

Waller's comments were his first since last week's Fed policy meeting where officials, as expected, maintained the overnight policy rate at 5.25% to 5.5%. Policy makers also affirmed forecasts from year-end 2023 for three rate cuts this year, based on the expectation that inflation will fall back toward 2% as the year moves forward.

However, unexpectedly strong inflation this year has called into question whether the Fed can deliver on its forecast. Fed officials are waiting to see if recent data reflects a temporary setback in the effort to reduce price pressures, and if so, this could mean dialing back rate cut expectations for the year.

At the press conference following last week's policy meeting, Fed Chairman Jerome Powell said current policy risks are "two sided."

"We're in a situation where if we ease too much or too soon, we could see inflation come back, and if we ease too late, we could do unnecessary harm to employment and people's working lives," he said. "We want to be careful" and the strength of the economy gives the Fed space to watch the data before deciding what to do with interest rate policy, he added.

At the end of February, Waller signaled he was among the officials with some skepticism about any near-term rate cuts, given that the economy is showing strong growth amid a very strong labor market.

In comments after his formal remarks on Wednesday, Waller said there is an extremely high bar to the central bank raising rates. “Something would really have to dramatically change on the inflation front to think about" pushing rates higher, he said.

Instead, he said, the question before the Fed is when to ease rates and "it’s just a question of when you start."

(Reporting by Michael S. Derby; Editing by Richard Chang and Leslie Adler)