Fed Governor Waller Makes the Case for a Cut
Fed Governor Christopher Waller, a voting member and one of the more respected voices at the Fed—and a potential candidate for the next Fed Chair—made a strong case for a 25bp rate cut at the upcoming July 30 meeting.
Inflation Commentary
Waller pointed out that inflation is near the Fed’s 2% goal, especially when you back out the impact of tariffs. He reminded markets that tariffs are one-time price shocks—not persistent inflation—and that most central banks “look through” temporary spikes like these as long as inflation expectations remain anchored, which they have. According to Waller, only about a third of the tariff costs are actually reaching consumers, with the rest absorbed along the supply chain.
Labor Market Weakness
While the June BLS Jobs Report appeared strong at first glance, Waller called out the quality of those gains—half of the new jobs were government hires, mainly in education, which are hard to seasonally adjust this time of year. He noted that private sector job growth, which the Fed focuses on, has been soft. He also highlighted the ongoing issue with BLS data reliability, pointing to the repeated pattern of major downward revisions—like when 2024 job numbers were later cut in half.
Soft Data, Soft Growth
Waller added that while BLS headlines seem strong, many soft data surveys tell a different story—showing more weakness across the economy. GDP growth is averaging just 1% for the first half of the year, unemployment is hovering near the Fed’s long-run target (though arguably worse when digging into the numbers), and inflation is close to goal. He believes if the Fed waits for a clear labor market breakdown, it will be too late—monetary policy takes time to work.
Too Restrictive?
Waller estimates the Fed Funds Rate is 1.25% to 1.50% above neutral. Even with conservative assumptions, we’re still at least 1% too restrictive. His takeaway: the Fed should begin easing back, starting with a 25bp cut at the July meeting.
While markets still see little chance of a cut this month, Waller’s case lines up with much of what we’ve been saying—this level of restriction isn’t necessary in today’s environment.
Housing Market Data
NAHB Builder Confidence
Builder confidence ticked up slightly in July. The NAHB Housing Market Index rose to 33—but still remains well below the neutral 50 level.
-
Current sales: +1
-
Future expectations: +3
-
Buyer traffic: -1
Builder sentiment remains cautious, and that’s showing up in new construction.
Permits, Starts, and Completions
Housing Permits held steady at 1.4M annualized, but single-family permits declined—an early signal of softer supply ahead. Housing Starts rose to 1.3M, but that gain came entirely from multifamily. Single-family starts dropped significantly.
The biggest concern: Completions fell 15% last month to a 1.3M pace.
Household formations (demand) are averaging 1.8M over the past five years, but current completions (supply) are falling well short. Permits and starts both show we’re not building fast enough.
What It Means
The supply imbalance remains in place—especially for single-family homes. If mortgage rates were to drop in a meaningful way, this imbalance could put upward pressure on home values again.