Federal Reserve Governor Bullard: FOMC Should Cut Rates by 25 Basis Points This Month

Federal Reserve Governor Waller explains his three reasons for supporting a rate cut. First, tariffs are a one-time increase in price levels and will not lead to sustained inflation after a temporary surge. As long as inflation expectations remain stable, the standard practice of the Federal Reserve is to "ignore" such price level effects. Second, a large amount of data indicates that monetary policy should be close to neutral, rather than restrictive. The actual GDP growth rate in the first half of this year may be around 1%, and is expected to remain soft for the rest of 2025, well below the FOMC committee's median long-term GDP growth rate expectations. At the same time, the unemployment rate is at 4.1%, close to the committee's estimate of the long-term unemployment rate. Excluding what I believe to be temporary tariff impacts, overall inflation is slightly above 2%, which is close to our target. Taking all these data into account, it suggests that the policy rate should be maintained near neutral levels - the FOMC committee's median estimate of the neutral rate is 3%, while the current rate is 1.25 to 1.50 percentage points higher than 3%, clearly not in the neutral range. The final reason for supporting a rate cut now is that although the labor market may not seem to have any problems on the surface, considering expected data revisions, private sector employment growth has nearly stalled and other data also indicates increased downside risks in the labor market. In a situation where inflation is close to target and there are limited inflation upside risks, we should not wait until the labor market deteriorates before cutting rates.