Christopher Waller and Fed Independence: A Look at the Future
When Federal Reserve officials met last month, investors felt sure the first interest rate cut of 2025 was imminent. But many wondered, what exactly would Governor Christopher Waller do?
To outside observers, Waller seemed in a difficult position. A close ally of former U.S. President Donald Trump had just joined the Fed, and would almost certainly vote for the large interest rate cuts Trump wanted. Moreover, Waller's name was in the mix to succeed the Fed chair, and he needed to boost his prospects by doing the same.
But he didn’t. When Trump’s new appointee, Michelle Bowman, dissented in favor of a 50-basis-point rate cut, Waller joined the majority in voting for a 25-basis-point reduction.
Waller had been advocating for the Fed to resume cutting interest rates for months, something some of his colleagues were skeptical about. In comments last week, he acknowledged that policy decisions are made through consensus, not by individual fiat.
“We all understand that we have to compromise on our positions to put in place a clear, consistent policy for the markets and the American people,” Waller said at an event in New York.
Waller’s choice reflects his policy approach and the image he’s cultivated for himself in investors’ minds. The former economics professor has long been a defender of central bank independence.
Waller is also known for making prescient, sometimes consensus-defying judgments based on nimble data analysis. Friends and colleagues say he wouldn’t be willing to sacrifice his reputation for political gain.
A High-Stakes Moment
Waller is finding himself in the spotlight at a high-stakes moment. Trump is not only weighing who will succeed the current Fed chair, but is also waging a broader campaign to exert more control over the Fed, which aims to keep politics out of interest rate decisions. Analysts say that damage to that independence could have profound negative impacts on the U.S. economy and global markets.
In addition to demanding lower borrowing costs, Trump and his allies also want the Fed to conduct a critical self-examination, and potentially major reforms.
With Waller having emerged as the leading contender to succeed Powell when his term ends in May, his stances on these issues are under intense scrutiny.
Those who know Waller say they expect him to defend the institution against moves that would erode its autonomy, especially regarding monetary policy. But he also isn’t viewed as someone determined to maintain the status quo. Since joining the board, he has questioned the Fed’s role on issues such as climate change, and pushed for cost-cutting. Friends say he could do more as chair.
“Chris is a very mission-focused leader,” said Kathy Mazzarella, who served as chair of the St. Louis Fed’s board of directors from 2016 to 2019, when Waller was the bank’s research director.
“He understands and respects the fact that the Fed needs to be focused on their mission, their dual mandate,” said Mazzarella, who is now CEO of Graybar. “But he also knows the world is evolving, and you have to find ways to stay relevant, functional and productive.”
Auditioning
Waller’s current policy outlook calls for lower interest rates, and his strong advocacy has led some to question whether he’s simply “auditioning” for the chair position. But he argues his views are based on a longstanding theory about how tariffs work, plus a fresh assessment of rising labor market risks.
Throughout the year, Waller has maintained that Trump’s tariffs would drive a one-time increase in price levels, not sustained inflation. This “textbook” approach meant the Fed could ignore the tariffs’ impact when setting interest rates, setting him apart from some colleagues.
Waller was early in spotting labor market weakness. In June, he cited a growing number of vulnerabilities, becoming the first policymaker to signal the Fed should resume cutting interest rates. At the next policy meeting in July, he dissented against the majority’s decision to hold rates steady.
Days later, fresh data revealed hiring was cooling sharply and the unemployment rate was rising, seemingly vindicating his view.
“You can never know what’s going on in his head, but his economic arguments are well understood,” said Michael Feroli, chief U.S. economist at JPMorgan. “Even if you disagreed with his arguments, like I did at the time, you would recognize that they were at least coherent.”
This isn’t the first time Waller has taken a contrarian view and stuck to it in the face of peer skepticism. In 2022, he argued the Fed could get inflation under control without causing a spike in unemployment, for which he was criticized. But so far, he’s been proven right.
Despite these qualifications, Wall Street will watch to see whether Waller bows to Trump’s pressure to support rate cuts he believes are economically unjustified. For now, many say he’ll stay true to his analysis.
Aditya Bhave, senior U.S. economist at Bank of America Securities, called Waller “a well-respected economist” and doesn’t think he’d urge colleagues to cut rates far below neutral – that is, the level that neither encourages nor discourages the economy – without a clear reason. “I’m not sure he would necessarily be supportive of deep cuts far below that level,” Bhave said.
Fed Defender
Despite his calls for lower interest rates, Waller continues to stress the importance of keeping politics out of Fed decisions.
In a May speech, he lauded the benefits of an independent Fed, and suggested firing Fed officials would be bad for the U.S. economy. In a July interview, he argued that the government must pick a chair who has credibility in fighting inflation, or “you’re going to see inflation expectations take off,” he said. “You’re not going to get lower rates. You’re going to get higher rates.”
Meanwhile, Trump has intensified his efforts to shape Fed policy. He routinely insulted Powell, and joked about firing him. Separately, he attempted to fire board member Lisa Cook, sparking a legal battle that is currently before the Supreme Court. He filled a Fed vacancy with Michelle Bowman, who took an unpaid leave from her post as a senior advisor to the president.
Trump’s team has also explored options for exerting more influence over regional Fed banks, thus expanding the scope of control over interest rates.
The Fed’s seven-member Board of Governors has the power to remove any official from those branches. Some analysts worry that if one more governor departs, Trump appointees will hold a majority on the Fed board, and could come under pressure from the administration to remove regional Fed presidents.
It’s unclear how Waller would respond to such pressure, but as chair of the committee that oversees regional Fed bank boards, he has already played a pivotal role in vetting several regional Fed presidents.
Mission Creep
Waller is likely to be an active partner in other Fed changes, having pushed regional Fed banks to cut costs and streamline operations, including laying off some 350 employees in 2023.
Treasury Secretary Janet Yellen is managing the search process for the next chair, and has said she may present a shortlist of finalists to Trump in December. Yellen has called for a “full institutional review” of the Fed, 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, such as former Governor Kevin Warsh, have voiced similar sentiments.
Waller supports the Fed’s balance-sheet management approach of ample reserves, but has expressed concerns about the trade-offs, including interest rate risk, when the central bank buys assets to stimulate the economy. Colleagues say he is also sympathetic to the view that the Fed should limit its involvement in diversity efforts and politically sensitive issues such as climate change.
When the Fed this month, along with other bank regulators, withdrew climate-related financial risk standards, critics warned this could threaten the stability of the banking system. Waller applauded the move. “Good riddance,” he said.
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