Here’s a bold statement: The U.S. economy is at a crossroads, and the decisions made today could shape its future for years to come. But here's where it gets controversial—while some see a robust recovery on the horizon, others fear lingering weaknesses that could derail progress. Governor Waller’s recent speech sheds light on this debate, offering a nuanced view of the economic outlook and its implications for monetary policy. Let’s dive in.
Governor Waller began by thanking the NABE for focusing this year’s conference on economic disruptions, including artificial intelligence—a topic he’s addressed frequently. However, his speech today centered on the U.S. economy’s trajectory and its impact on the Federal Open Market Committee’s (FOMC) dual goals: maximum employment and stable prices. And this is the part most people miss—the balance between these goals is far from straightforward, especially in today’s complex economic landscape.
At the January FOMC meeting, the Committee voted to hold the policy rate steady after three 25-basis-point cuts since September. These cuts were driven by slowing job gains and increased downside risks to employment, despite somewhat elevated inflation. Waller, however, dissented, favoring another cut. He argued that the risk of a substantial labor market downturn outweighed the limited risk of higher inflation, advocating for a policy rate closer to a neutral setting. Here’s the controversial part: Waller believes policymakers should ‘look through’ tariff effects on inflation, focusing instead on underlying economic trends. This perspective challenges conventional wisdom and invites debate.
Since January, economic data has been mixed. The January employment report was surprisingly strong, with job creation surpassing expectations. This is good news for workers struggling in a slow-hiring labor market. However, Waller cautions that one month of positive data doesn’t confirm a trend, especially after 2025’s weak job creation—the worst outside of a recession since 2002. But here’s the kicker: If February’s data supports January’s improvement, Waller’s outlook could shift toward a more positive stance, potentially favoring a pause in rate cuts. Yet, if labor market weakness persists, he argues for further rate reductions.
Overall economic activity has been solid, with real GDP growth estimated at 1.4% in the fourth quarter of 2025. Consumer and business spending remained robust, though household spending shows signs of softening, particularly among lower- and middle-income households. Here’s where it gets tricky: While higher-income households, buoyed by stock market gains, continue to spend, the majority of households—who account for 45% of spending—are cutting back. This divergence raises concerns about the sustainability of economic growth.
The labor market’s fragility is further highlighted by 2025’s weak job creation, revised downward to just 181,000 new jobs. Waller notes that even this figure may be overstated, suggesting payroll employment likely fell in 2025—a rare occurrence since 1945. The January jobs report, while encouraging, was concentrated in specific sectors like healthcare and construction, leaving questions about broader labor market health. And this is the part most people miss: Private-sector employment estimates from firms like ADP and Revelio paint a less rosy picture, suggesting the official data may contain more ‘noise’ than ‘signal.’
Turning to inflation, the FOMC’s 2% goal remains a key focus. While headline CPI inflation was below expectations in January, core inflation rose 0.3%, driven partly by tariff effects. Waller estimates that underlying inflation, excluding tariffs, is close to the 2% target. Here’s the controversial part: He argues that tariffs only temporarily boost inflation, advocating for policymakers to ‘look through’ these effects. This stance, rooted in traditional central bank wisdom, may spark debate among those who see tariffs as a persistent inflationary force.
Looking ahead, Waller’s policy stance hinges on upcoming data. If February’s labor market data confirms January’s strength, he may support holding rates steady. However, if weakness persists, he’ll push for another rate cut. Here’s the question that divides economists: Is the economy on a solid footing, or are we overlooking vulnerabilities? Waller’s speech invites us to consider both perspectives, emphasizing the need for careful analysis as more data emerges.
In conclusion, Governor Waller’s insights offer a balanced yet thought-provoking take on the U.S. economy. His willingness to dissent and challenge conventional views highlights the complexity of policymaking in uncertain times. Here’s the final thought: As we await February’s data, the debate over the economy’s health—and the appropriate policy response—is far from over. What’s your take? Do you agree with Waller’s approach, or do you see things differently? Let’s keep the conversation going in the comments.
