US Fed rate cut bets fall below 50% after Governor Chris Waller’s comments. What did he say?

Expectations of a U.S. Federal Reserve rate cut at its September 16 meeting have weakened sharply, with traders now pricing in less than a 50% chance of a reduction, according to CME FedWatch data.

The probability has fallen from more than 60% a week earlier, following comments from Fed Governor Christopher Waller on the upcoming meeting.

The shift in expectations comes after the U.S. Fed Chair Kevin Warsh delivered a sharp reminder that the path ahead for monetary policy may not be straightforward. Speaking at the Jackson Hole Symposium in Wyoming last week, Warsh said the central bank still had “work to do”, pointing to the possibility of rate hikes at upcoming meetings this year.

What did Waller say?

U.S. Federal Reserve Governor Christopher Waller said he would support keeping the Fed funds target rate unchanged if incoming data shows that inflationary pressures are easing. However, he added that he would support a rate hike if inflation fails to moderate.

While Waller acknowledged that inflation remains “meaningfully above” the Fed’s 2% target, he said recent trends “suggest we are finally seeing some signs of disinflation.”

“If this continues in the data over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,” Waller said in remarks for a Reuters interview.

The next two weeks will bring the only major inflation reports available to the Fed ahead of the meeting: the consumer and producer price indexes that the Bureau of Labor Statistics will release next week. Both reports feed heavily into the Commerce Department’s personal consumption expenditures price index, which the Fed uses as its main inflation barometer.

Despite headline inflation standing at 3.7% and core inflation at 3.3% in July, Waller said the underlying trends are actually “better than the core numbers suggest”. He also said the annual numbers “are not the best guide for where inflation is today.”

Waller pointed to the three-month inflation rate measured by the Fed’s preferred gauge, which has fallen from 4.76% in February to 3.05% currently. “That is a considerable improvement, and the speed of this downward trajectory is encouraging,” he said.

As a result, the benchmark U.S. Treasury yield pulled back for the second straight session after touching its highest level since November 2023.

Rate-hike expectations had spiked in recent sessions as long-dated bond yields climbed to their highest levels in years amid a global bond selloff driven by fears over inflation, ballooning debt and geopolitical uncertainty.

Earlier this week, the yield on 10-year U.S. Treasury notes climbed to a near three-year high of 4.81%, with a further move towards 5% threatening to unsettle already jittery stock markets.

Japan's 10-year yield has moved above 3%, its highest level in 30 years, while Australia's 10-year government bond yield rose to 5.198%, the highest in more than 15 years.

India has not been insulated from the selloff. The 10-year Indian government bond yield briefly crossed 7% on Wednesday for the first time in three months, as the worsening global debt rout and another spike in oil prices rattled investors.

Britain's 30-year borrowing costs are at 30-year highs, while German and French 10-year yields have reached levels last seen in 2011 and 2008, respectively. In the US, 30-year yields climbed to their highest level since 2007 earlier in August.

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