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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.

Stocks closed lower across the board today.

• The Dow Jones fell 279 points, ending the day at 44,371.51.

• The S&P 500 slipped 20.71 points, closing at 6,259.75.

• Mortgage Bonds also finished lower, applying slight upward pressure on mortgage rates.

Spotlight on the Fed – Mixed Signals and Market Frustration

Fed Chair Jerome Powell is facing increasing criticism for his decision to keep interest rates unchanged—especially given the backdrop of easing inflation and a labor market showing signs of strain.

To recap, Powell led a 1% rate cut cycle late last year, delivering three cuts in September, November, and December—even though inflation was slightly higher and the job market was notably stronger than it is today.

Powell has long described the Fed’s stance as “data dependent,” with an emphasis on backward-looking indicators. That approach contributed to the inflation surge we saw in 2021–2022, when the Fed kept rates at zero and continued purchasing Treasuries and Mortgage-Backed Securities (MBS) through Quantitative Easing—despite a $5 trillion stimulus-fueled economy.

The result? Inflation reached levels not seen in over four decades. While it has come down meaningfully, we’re still managing the aftermath.

Now, Powell is signaling a “forward-looking” approach—citing concerns over the potential inflationary impact of new tariffs, even though those effects haven’t shown up in the data. Tariffs may cause one-time price adjustments, but they don’t typically lead to persistent inflation. Many economists argue that shouldn’t be a reason to delay rate cuts.

The Case for a Rate Cut

From our perspective, a forward-looking Fed makes sense, but consistency matters. Right now, inflation is moderating, and nearly every labor market report—except the often-revised BLS Jobs Report—suggests a softening trend. Waiting too long to respond could risk deeper cracks in the labor market.

It’s also worth noting: monetary policy remains restrictive. By most estimates, the Fed is currently holding rates about 1% above neutral. Even a 25 basis point cut would still leave policy in a restrictive stance, just slightly less so. A small adjustment now could help stabilize hiring momentum without jeopardizing the Fed’s inflation goals.

A Voice of Clarity – Governor Waller

One Fed official who seems to grasp this balance well is Governor Christopher Waller, a leading candidate to become the next Fed Chair.

Waller spoke yesterday and reaffirmed his call for a rate cut at the upcoming July 30 meeting—even after the stronger-than-expected June Jobs Report.

His reasoning is clear:

• Inflation has come down far enough to justify a move.

• Tariff concerns are overstated and shouldn’t dictate policy.

• The Fed remains too restrictive, and a cut would bring policy closer to neutral without losing control of inflation.

Crestone Mortgage Economic Commentary – June Jobs Report

The Bureau of Labor Statistics (BLS) reported that 147,000 jobs were created in June, coming in above expectations of 110,000. Adding to the upside, revisions to the prior two months showed a net gain of 16,000 jobs—a notable shift after a long string of negative revisions.

However, this report stands in stark contrast to ADP’s data released the day before, which showed a loss of 33,000 private sector jobs.

Public vs. Private Sector Breakdown

While the headline number looks solid, private sector job growth was just 74,000, the weakest in several months. The remaining 73,000 jobs came from the government sector, with 63,000 of those tied to state and local education.

That education number raised a few eyebrows. June typically sees seasonal slowdowns in school-related employment as summer begins. In raw terms, there were actually 542,000 fewer education jobs, but a seasonal adjustment added 605,000 jobs, bringing the reported number into positive territory. That adjustment is significant—and potentially misleading in gauging true labor market strength.

Wage and Earnings Trends

One bright spot in the report was cooling wage inflation.

• Average Hourly Earnings rose 0.2%, a notch below expectations.

• Year-over-year wage growth slowed to 3.7%, down from 3.9%.

In addition, the average workweek declined to 34.2 hours, down by 0.1 hour. When converted into full-time job equivalents, that reduction is the rough equivalent of nearly 500,000 lost jobs.

Combining wages and hours worked, average weekly earnings actually fell 0.1% in June, and year-over-year earnings growth slowed from 3.9% to 3.4%—another sign of easing income pressures.

Household vs. Business Surveys

The BLS jobs report includes two surveys:

• The Business Survey feeds the headline job creation number.

• The Household Survey informs the unemployment rate.

The Household Survey showed 93,000 new jobs, weaker than the headline figure. However, since 130,000 people exited the labor force, the unemployment rate declined to 4.1%. That drop isn’t necessarily a positive—it reflects fewer people being counted, not more people being hired.

Unemployment Claims

The latest Initial Jobless Claims came in at 233,000, slightly down from 237,000, but still part of a six-week stretch of elevated claims. Meanwhile, Continuing Claims held steady at 1.964 million, marking the sixth straight week above 1.9 million and creeping closer to the 2 million mark.

This trend suggests that while the pace of job creation remains positive, those who lose jobs are having a harder time finding new ones—a sign that hiring is slowing, even if layoffs haven’t surged.

Personal Consumption Expenditures (PCE) 

The Fed’s preferred gauge of inflation, the PCE Index, came in largely as expected for May. Headline inflation rose 0.1% for the month and 2.3% year over year — right on target with market forecasts.

The Core PCE, which excludes food and energy and is the Fed’s primary focus, rose 0.2% on a rounded basis, slightly above the expected 0.1%. However, the actual reading was 0.18%, which isn’t too far off from the Fed’s comfort zone. On an annualized basis, that monthly figure puts Core PCE just above the Fed’s 2% target. That said, April’s number was revised higher, pushing the year-over-year Core rate up to 2.7%, slightly above the 2.6% estimate.

While recent monthly data looks encouraging, comparisons to last year’s very low readings are making it difficult to show meaningful year-over-year improvement. This dynamic will likely remain a challenge until early 2026, unless we begin to see very soft monthly inflation prints.

There is some positive momentum:

• The 12-month Core PCE is at 2.7%

• The 6-month trend is running at 2.9%

• The 3-month trend, however, has dropped to just 1.6%

This suggests inflation is behaving better in recent months, especially over the last quarter.

Notably, there weren’t many major contributors to inflation in May’s data. Shelter, which makes up about 18% of Core PCE, was the biggest driver. It rose 0.26% month over month — a moderate pace — and has been gradually slowing. On a year-over-year basis, shelter inflation is still running at 4.1%, but is slowly catching up to more current market-based measures like Zillow, which shows rents up just 3.2%.

One soft spot in the report was Personal Incomes, which fell 0.4% for the month, missing the +0.3% forecast. However, this drop follows a one-time surge in April from Social Security true-up payments, so the decline essentially resets that temporary bump. Meanwhile, private sector wages rose 0.4% in May and are up 4.6% year over year — still a healthy pace.

Consumer Spending also came in below expectations, falling 0.1% instead of the anticipated +0.1%, indicating that consumers may be pulling back a bit.