Federal Reserve Governor Waller said on Monday that strong economic data since the Federal Open Market Committee (FOMC) meeting in September suggests a need to slow the pace of rate cuts. Since the Fed's substantial rate cut last month, labor market data has shown a rebound in employment, and inflation has exceeded expectations. In prepared remarks for a conference at Stanford University in California, Waller said, "While we do not want to overreact to this data or ignore it, I believe the overall data indicates that monetary policy should be more cautious in the pace of rate cuts than it was at the September meeting."

On September 18, the FOMC lowered the target range for the federal funds rate by half a percentage point, to 4.75%-5.0%. Waller is a voting member of the FOMC.

Waller outlined three possible paths for future interest rates—a slow and steady decline, a more substantial rate cut, or a pause in rate cuts. Regardless of the path taken, the ultimate long-term goal is the same: to reach the so-called neutral rate, a theoretical level that neither stimulates nor inhibits economic activity.

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Waller mentioned that despite some ongoing weakness in manufacturing, the overall economy remains strong, especially with favorable revisions to consumer income and savings data. In the first half of this year, the U.S. real GDP grew at an annual rate of 2.2%, and Waller expects the growth rate for the third quarter to be even faster.

He also noted that consumer spending, which accounts for 70% of GDP and is the engine of the economy, remains robust. As interest rates decline, pent-up demand for home renovations and other large purchases will drive consumer spending growth.

Waller said, "With the labor market roughly balanced, employment near maximum levels, and inflation roughly close to our target over the past few months, as a policymaker, I want to do everything I can to keep the economy on this path. For me, the core issue is the magnitude and speed of rate cuts, and I believe the current federal funds rate is at a restrictive level."

In the first scenario assumed by Waller, the economy continues to be robust, and inflation gradually approaches the Fed's 2% annual target. The FOMC can lower interest rates to neutrality at a "steady pace" while closely monitoring upcoming data.

If the risk of economic recession increases, officials may decide to accelerate the pace of rate cuts.

Waller said, "Another less likely scenario is that inflation significantly falls below 2% for a period of time, or the labor market deteriorates markedly. This indicates a decline in demand, and the FOMC may suddenly fall behind the curve, prompting policy interest rates to fall to neutral levels more quickly."The third scenario is that inflation picks up again, possibly due to stronger consumer demand or supply disruptions. In this case, as long as the labor market remains healthy, the Federal Reserve may pause rate cuts until inflation subsides.

Waller said: "Regardless of what happens in the short term, my baseline is still a gradual reduction in policy rates next year. Although there has been a lot of attention on the magnitude of rate cuts in the next one or two meetings, I believe that if the economy continues to maintain its current good condition, this will be a gradual process."

Many economists estimate that the current level of the neutral rate is between 2% and 3%. According to the median of the Federal Reserve's September economic forecast, the long-term federal funds rate is expected to be 2.9%.

Waller indicated that he would not overinterpret the October employment report, which will be released on November 1st, less than a week before the Federal Reserve's November policy decision. Due to the "quiet period" before the meeting where Federal Reserve officials are not allowed to speak publicly, the impact of this report may be limited.

Waller said: "This report is likely to show a significant but temporary increase in unemployment due to the recent two hurricanes and the strike at Boeing. I expect these factors could reduce employment growth by more than 100,000 this month, and the unemployment rate may experience some minor fluctuations, but it is uncertain whether it will be particularly noticeable."

According to FactSet data, economists unanimously forecast that non-farm employment in October will increase by 120,000, while the increase in September was 254,000. The unemployment rate is expected to remain at 4.1%.

On Monday, the interest rate futures market showed that there is about an 86% chance of a 25 basis point cut in the federal funds rate on November 7th, while most people believe there will be no further rate cuts.