Waller, a Top Fed Chair Contender, Backs Rate Cuts Without Bowing to Trump

Federal Reserve Governor Christopher Waller.

(Bloomberg) -- When Federal Reserve officials met last month, investors were convinced the first interest-rate cut of 2025 was coming. But what, many wondered, would Governor Christopher Waller do?

To outsiders, Waller was in a difficult spot. A close ally of President Donald Trump had just joined the central bank and was all but certain to vote for the kind of drastic rate cut the president wants. Waller — who’s on the administration’s shortlist to take over as Fed chair — might have felt pressure to boost his prospects by doing the same.

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He didn’t go for it. While Trump’s new appointee, Governor Stephen Miran, dissented in favor of a half-percentage-point reduction, Waller voted with the majority for a quarter-point move.Federal Reserve Governor Christopher Waller.Photographer: Michael Nagle/Bloomberg

Waller had for months been advocating for the Fed to resume rate cuts — and some of his colleagues were skeptical. He’d also telegraphed that a quarter point would be sufficient. In comments last week, he also acknowledged that policy decisions are made by consensus, not any one person.

“We all understand we have to compromise somewhat in our positions to have a clear, consistent policy setting for markets and the American people,” Waller said at an event in New York.

Waller’s choice encapsulates his approach to policy – and the image he’s built for himself in the minds of investors. The former economics professor has long been a champion of central bank independence. He’s also known for making prescient, sometimes out-of-consensus calls based on a flexible analysis of data. That’s not a reputation he’s willing to sacrifice on the altar of personal ambition or political gain, friends and associates say.

High Stakes Moment

The spotlight is falling on Waller at a high-stakes moment. Trump isn’t just weighing candidates to be the next chair. He’s pursuing a wider campaign to exert more control over the Fed, which aims to keep politics out of its interest-rate decisions. If that independence were compromised, analysts say, it could have profound negative consequences for the US economy and global markets.

As well as demanding cheaper borrowing costs, Trump and his allies want the Fed to take a critical look at itself – and possibly make big reforms. Because Waller has emerged as a top contender to replace Jerome Powell when his term as chair ends in May, his approach to these issues is under intense scrutiny from all sides.

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People who know Waller say they expect him to defend the institution and oppose moves that would undermine its autonomy, especially on monetary policy. But he isn’t viewed as someone bent on preserving the status quo either. Since joining the board, he’s questioned the Fed’s role on issues like climate change — and pushed for cost-cutting across the system, something friends say he could do more of as chair.

“Chris is very much a mission-based leader,” said Kathy Mazzarella, who was chair of the board of directors at the St. Louis Fed from 2016 to 2019 while Waller was the bank’s director of research.

“He understands and respects the fact that the Fed needs to stay focused on their mission, their dual mandate,” said Mazzarella, chief executive officer at Graybar. “But he also knows that the world evolves and you have to look at ways to remain relevant and functional and productive.”

The Audition

Waller’s policy outlook right now calls for lower rates, and his strong promotion of that has led some to question whether he’s simply auditioning for the chair. But he argues his views are based on a longstanding theory of how tariffs work, and a more recent assessment of rising risks in the labor market.

Waller has maintained all year that Trump’s import taxes would drive a one-time increase in the level of prices, rather than a persistent inflationary problem. That “textbook” approach means the Fed can look through tariff effects when setting rates, and it sets him apart from some colleagues.

When it came to spotting weakness in the labor market, Waller was in the vanguard. In June, he cited growing signs of fragility and became the first policymaker to say the Fed should resume cutting rates. At the next policy meeting in July, he dissented against the majority decision to leave them unchanged.

His take appeared vindicated just days later when new data showed a sharp cooldown in hiring and a rise in unemployment.

“You can never know what’s going on inside his head, but I do know you can make sense of the economic arguments,” said Michael Feroli, chief US economist at JPMorgan. “Even if you disagree with his arguments, which I did at the time, I think you recognize they’re at least coherent.”

That’s not the first time Waller took a contrarian view and stuck with it in the face of skepticism from his peers. He took heat for arguing in 2022 that the Fed could bring inflation to heel without a spike in the jobless rate. But he’s so far proved correct.

Despite such credentials, Wall Street will be watching to see whether Waller — if named Fed chair — will bow to pressure from Trump and back rate cuts he doesn’t think are economically justified. For now, many say he’ll remain true to his own analysis.

Aditya Bhave, senior US economist at BofA Securities, called Waller “a well respected economist,” and doesn’t expect he would urge colleagues to bring rates much lower than neutral — the level where they neither encourage nor inhibit the economy – without a clear rationale. “I’m not sure he would necessarily be on board with cutting aggressively below that,” Bhave said.

Fed Defender

Even as he’s called for lower rates, Waller has continued to emphasize the importance of keeping politics out of Fed decisions.

In a May speech, he hailed the benefits of independent central banks and signaled that the firing of Fed officials would be bad for the US economy. And in a July interview on Bloomberg TV, he argued the administration must select a chair who has credibility as an inflation fighter.

Otherwise, “you’re going to see inflation expectations spike,” he said. “You will not get lower interest rates. You will get higher interest rates.”

Trump, meanwhile, has escalated his efforts to shape Fed policy. He’s lobbed relentless insults at Powell for not lowering rates, flirted with removing him from office and moved to fire Governor Lisa Cook, igniting a legal battle that now sits at the Supreme Court. He filled an opening at the Fed with Miran, who took unpaid leave from his position as a senior adviser to the president.

Trump’s team has also explored options for exerting more influence over the Fed’s regional banks as a means to expand its control of interest rates. The Fed’s seven-member board has the authority to remove any officer from those branches. Some analysts worry that a board with a majority of Trump appointees — which could materialize with the exit of just one more governor — could be pressured by the administration to remove regional presidents.

It’s not clear how Waller would respond to such pressure. But as chair of the committee that oversees the regional Fed banks, he’s already played a central role in vetting several reserve bank presidents.

Mission Creep

Waller could prove a willing partner to other changes at the Fed. He has pushed the regional Fed banks to trim costs and streamline operations, including a reduction of about 350 staffers in 2023.

Treasury Secretary Scott Bessent — who is managing the selection process for the next chair, and said he’ll likely give Trump a list of finalists in December — has called for the Fed to undertake a “comprehensive institutional review” and accused the central bank of jeopardizing its independence by engaging in “mission creep” and “unconventional” balance-sheet policies. Other contenders for the Fed chair job, such as former Governor Kevin Warsh, have expressed similar views.

Waller has backed the Fed’s ample reserves approach to managing its balance sheet, but expressed concerns about the trade-offs — including interest-rate risk — when central banks buy assets to stimulate the economy. He’s also sympathetic to the view that the Fed should limit its involvement in hot-button political issues, such as diversity efforts and climate change, associates said.

When the Fed joined other bank regulators this month to withdraw climate-related financial risk standards, critics warned it could threaten the stability of the banking system. Waller applauded the move.

“Good riddance,” he said.

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