Federal Reserve Governor Waller urges caution at present and indicates that interest rate cuts may occur later this year.

Bloomberg News — Federal Reserve Governor Christopher Waller said last Friday (March 20) that he remains cautious about the current economic outlook but still sees a chance of rate cuts later this year.

Waller, who has previously supported rate cuts, stated that recent developments in the labor market and uncertainties surrounding the Iran war require a more cautious approach. “That doesn’t mean I will be on hold for the rest of the year. I just want to see how things develop. If the situation progresses relatively smoothly and the labor market remains soft, I will again advocate for lowering the policy rate later this year.”

Currently, markets have almost entirely priced out the possibility of significant rate cuts in the remainder of 2026 and even into 2027, a stark contrast to expectations before the outbreak of war, when traders generally anticipated two or three rate cuts this year. However, soaring oil prices and the uncertainty about the war’s duration have completely changed market expectations and prompted Waller and other policymakers to reassess their positions.

Waller previously voted against the decision to hold rates steady at the January Federal Open Market Committee (FOMC) meeting but chose to follow the majority and keep rates unchanged at a meeting earlier last week.

Weakness in the labor market remains a core concern, but inflation risks from the war must also be monitored.

Waller’s earlier dovish stance was mainly due to a clear slowdown in the labor market, with almost no net employment growth throughout 2025. However, last Friday he pointed out that labor force participation has also not expanded, so “zero net growth” still keeps the unemployment rate stable, even with a decline of 92,000 non-farm jobs in February. “If the next employment report shows another 90,000 decline, that would be four negative reports out of five. For me, that’s definitely not zero growth. We need to seriously consider the poor state of the labor market.”

He added, “I don’t think this war will bring any positive help in the future, but we must watch how inflation evolves.”

Currently, Waller is relatively optimistic about overall inflation. He believes tariffs have a one-time effect, and inflation is generally trending structurally toward the Fed’s 2% target. “If these tariff effects do not fade by the second half of the year and inflation begins to rise, we will face a tricky situation: should we worry about inflation and risk a recession, or not?”

Waller said, “I will closely monitor the labor market’s future performance to decide whether to start advocating for rate cuts at upcoming meetings, and also keep an eye on inflation trends.”

Bowman Takes a More Aggressive Rate Cut Stance: Expect Three Cuts This Year

Earlier the same day, Michelle Bowman, also a Fed governor nominated by President Trump, said in an interview that she believes the Fed can cut rates three times this year. This would bring the benchmark federal funds rate below the neutral level that FOMC officials consider neither stimulative nor restrictive to economic growth.

Bowman maintained this stance despite expecting “strong economic growth this year” supported by the current administration’s supply-side policies.

According to the updated Fed “dot plot” released last Wednesday, 19 policymakers participated, with only three (including Bowman) expecting significant rate cuts this year, indicating she is relatively dovish on monetary policy.

War Uncertainty Drives the Fed to Adopt a Cautious Stance

The energy shocks and high oil prices triggered by the Iran-U.S. conflict have become the biggest uncertainties influencing the Fed’s current decision-making. Waller’s comments reflect the Fed’s attempt to balance between a weakening labor market and the potential for persistent inflation risks.

Market expectations have been significantly adjusted, with the probability of rate cuts in the near term approaching zero. However, if the labor market deteriorates further and inflation shows no clear signs of being under control, the window for rate cuts later this year could reopen.

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