While the Federal Reserve is on the "right track" to reach its 2% inflation goal, the central bank must be cautious when approaching rate cuts, Fed Governor Christopher Waller said Jan. 16.
"When the time is right to begin lowering rates, I believe it can and should be lowered methodically and carefully," Waller said at an online Brookings Institution event.
In past cycles, the Federal Open Market committee "cut rates reactively and did so quickly and often by large amounts" Waller added. "This cycle, however, with economic activity and labor markets in good shape and inflation coming down gradually to 2%, I see no reason to move as quickly or cut as rapidly as in the past."
At its December meeting, the Fed held the federal funds rate steady at a range of 5.25% to 5.5%; however, Chairman Jerome H. Powell signaled that the committee will soon consider rate cuts.
"As long as inflation doesn't rebound and stay elevated, I believe the FOMC will be able to lower the target range for the federal funds rate this year," Waller said.
David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy at Brookings, asked Waller if it's risky to approach rate cuts too slowly, which could end up leading to overtightening.
"Well, that is one of the risks that I mentioned," Waller replied. "I think we're all very aware of it."
However, he maintained his position that federal regulators shouldn't take that step until they're "relatively convinced" that inflation is sustainably near the 2% target.
Ultimately, "the timing and number of rate cuts will be driven by the incoming data," Waller said, which includes the consumer price index report expected next month.