What’s Next for Rate Cuts? The Fed Is Watching Jobs and Prices.

A Federal Reserve official predicted quarter point rate cuts if data looked ‘fine’. But he also set out a scenario for a pause — or faster reductions.

Having made their first interest rate cut in more than four years this week, Federal Reserve officials are keeping their options open as they try to figure out how rapidly to lower borrowing costs in the months ahead.

Fed officials could lower interest rates in standard quarter-point increments if the data continue to look “fine,” Christopher J. Waller, a Fed governor, suggested in a CNBC interview on Friday. If inflation were to pick back up, Fed policymakers could hold rates steady.

And if the job market cools more than expected or if inflation comes in weaker than expected, the Fed could reduce interest rates more rapidly.

“If the data starts coming in soft and continues to come in soft,” Mr. Waller said in the interview, he would be willing “to be aggressive on rate cuts to get inflation closer to our target of 2 percent.”

Central bankers appear to be poised to lower borrowing costs much more quickly than most economists had expected as recently as a month or two ago. That has left some questioning what prompted the Fed’s pivot toward a more proactive path. And the Fed’s decision to cut rates by a larger-than-usual half point this week has many investors wondering whether other large moves could be on the table.

Mr. Waller’s remarks offer insight into the Fed’s thinking at a critical juncture. Policymakers are trying to bring interest rates — which they lifted rapidly starting in 2022 and have left at a high level since 2023 — back toward a more normal setting, at which the rates no longer weigh so heavily on the economy. But how rapidly to do that is a challenging question.

If policymakers cut interest rates sharply but inflation ticks back up or proves stubborn, as it has repeatedly over the last several years, there is a risk that the central bank’s moves could end up looking premature. That could allow price increases to remain at least slightly too hot for comfort.

On the other hand, if Fed officials take their time and lower interest rates only gradually at a moment when inflation is cooling and the job market is slowing, they could end up hitting the brakes on the economy too hard. That could cause unemployment to rise more sharply, or push inflation to uncomfortably low levels.

In fact, while Fed officials have been much more concerned with inflation that is too fast than they have with inflation that is too slow over the past three years, Mr. Waller made clear in his CNBC remarks that their attention is beginning to shift.

“I just think that inflation is on a lower path than we were potentially expecting,” Mr. Waller said. “I think inflation is on the right path, as long as we don’t let it get too low.”

Mr. Waller is just one of the twelve Fed officials who vote on monetary policy decisions at a given meeting. Still, his remarks carry weight because they are among the first to come out since the central bank made its decision to cut interest rates earlier this week. And they align with and add detail to what Jerome H. Powell, the Fed chair, signaled during his post-decision news conference on Wednesday.

Mr. Powell repeatedly pointed to the Fed’s Summary of Economic Projections — a set of forecasts for growth, unemployment and interest rates that officials release once per quarter — as a good summary of what the central bank might do next. The projections suggested that officials will lower rates two more times this year.

“The actual things that we do will depend on the way the economy evolves,” Mr. Powell said on Wednesday. “We can go quicker if that’s appropriate, we can go slower, if that’s appropriate. We can pause if that’s appropriate.”

Some of the Fed’s decision to make a large rate cut this week was rooted in the job market — unemployment has ticked up to 4.2 percent, up notably from a low of 3.4 percent last year, and hiring has been slower in recent months. But Mr. Waller’s comments suggest that for him, it was also at least somewhat tied to recent inflation developments.

Mr. Waller said that estimates for the August personal consumption expenditures index inflation number, which will be released next week are “very low” even with “very high housing services inflation.”

That caused him to think, “Wow, inflation is softening much faster than I thought it was going to,” he said, and prodded him to support a larger-than-usual half point rate cut in September.

But not everyone agreed. Michelle Bowman, another Fed governor, voted against the Fed’s decision to lower its borrowing costs by half a point, preferring a quarter-point reduction. She released a statement explaining her logic on Friday.

“I see the risk that the Committee’s larger policy action could be interpreted as a premature declaration of victory on our price stability mandate,” she said.