Fed Speak: Waller and Jefferson give contrasting perspectives

19 Nov 2025 , 12:47 PM

TWO CONTRASTING VIEWS ON US MONETARY POLICY

The US economy finds itself in a dichotomy of sorts. On the one hand, inflation continues to remain sticky and is a full 100 bps above the Fed target rate of 2%. In addition, the tariffs have the potential to keep inflation higher for a sustained period of time. That makes a case for a cautious approach to rate cuts. At the same time, the unemployment rate remains elevated at 4.3%, and it looks like the macro situation could deteriorate. Hence, a series of rate cuts would be par for the course to keep the US economy robust.

Amidst this growing divergence of views, there is a third dimension; lack of adequate reliable data due to the prolonged US shutdown. The unemployment figures for September and October have not been declared. The September CPI inflation in the US was announced a full 12 days late. For the month of October, the PCE inflation and the Q3-GDP data are not out still. In this data vacuum, Fed will have to make monetary policy decisions. That is why we look at 2 contrasting views. On one hand, Chris Waller believes there is room for more rate cuts, while Philips Jefferson feels the US economy may be close to the neutral rate.

WHY CHRIS WALLER MAKE A CASE FOR MORE RATE CUTS?

FOMC member, Chris Waller, believes there is a strong case for more than one rate. According to Waller, there is a divergence between real-world challenges and economic theory. This becomes pressing when business profits, losses, and jobs are on the line. Chris Waller has added that despite the shutdown in the US, there were enough direct and indirect data points on the US economy to offer a clear perspective.

According to the speech delivered by Waller, the US labour market was weak with the unemployment poised to rise substantially from 4.3%. While the GDP growth has been robust, it has not been supported by commensurate creation of jobs or a rise in wages. Also, the evidence suggests that impact of tariffs on prices may be one-time. Once that impact is factored in the next few months, the level of inflation will stabilize.

HOW CHRIS WALLER SEES INFLATION AND UNEMPLOYMENT

Chris Waller favours aggressive rate cuts despite the risk of tariffs pushing up inflation. Firstly, Waller feels that the labour market is still weak and the low unemployment is only because the new hires and the fires are slow, especially after the pandemic experience. Second, inflation has not shown big impact of tariffs, and has, at best, been marginal. This is in sync with the broad view that the impact of tariffs on inflation may be one-off. Net of tariff impact, inflation may be closer to 2%. Thirdly, Despite inflation running near 3.0% as per last CPI reading, the medium and long-term inflation expectations were well anchored.

Waller believes that the real concern will be on jobs. The “no hire, no fire” policy was an outcome of the pandemic. Businesses are holding off on hiring, but unwillingness to lay-off workers, keeps labour markets in equilibrium. There have been no jobs report after August, but the trend was of new payroll additions falling over 70%. The better-than-expected growth in Q2 may be due to front-loading of economic activity ahead of tariff imposition. Hence Q3-GDP growth, could hint at tapering GDP growth.

Waller believes Q3 GDP growth would disappoint compared to Q2. That is evident in the deceleration of economic activity. Some of the weakness post-Q3 may be attributed to the shutdown, but growth would recoup after the shutdown. With job creation stalling from May to August, the macro strategy must veer towards boosting jobs and economic growth through lower rates. According to Waller; more rate cuts are the need of the hour.

PHILIP JEFFERSON WANTS “PAUSE AND REFLECT” APPROACH

Speaking at the Federal Reserve Bank of Kansas City, the Fed Vice Chair Philip Jefferson, outlined the need to be cautious on rate cuts and balance the risks and rewards. In terms of the broad view, Jefferson too believes that the risks to unemployment were higher than the risks to inflation. However, Jefferson has underlined that aggressive rate cuts may not be the answer to the problem.

What does Jefferson thin about jobs situation? According to Jefferson, there are two sides to the jobs story. On the one hand there are companies that already indicated a slower pace of hiring or even cutbacks in staff. However, on the other hand, another set of businesses are ready to move forward with previously delayed hiring and investment. Hence the overall impact on jobs may be more balanced than skewed on the downside. A clear picture will emerge after the shutdown is fully lifted and the lagged economic activity normalizes.

Jefferson sees unemployment rising from the current 4.3% levels, but with limited upside risk. Even that could get neutralized in next one year. However, Jefferson is worried that inflation may stay 100 bps above Fed target of 2%. Jefferson feels that this gap is largely on account of the tariff impact and once that is factored into prices, the inflation may trend towards 2%. Jefferson has underlined that there cannot be a compromise on returning inflation to the Fed’s 2.0% target. How does Jefferson see monetary policy evolving?

According to Jefferson, the 25-bps rate cut in October was justified due to the disconnect between policy intent and data. However, after the 25-bps rate cut, rates had moved closer to the neutral rate. Hence, the priority was to be cautious on further rate cuts. Jefferson underlined that since the Fed would be putting its balance sheet roll-off on hold, the automatic liquidity infusion will magnify the impact of rate cuts!

For now, the Fed will continue to take up policy one-meeting at a time. But going ahead, the policy matrix is surely going to get a lot more complex.