The current US economic data seems to be developing in the direction of Christopher Waller (Christopher Waller)'s predictions, and the market is increasingly optimistic about the prospects for the US economy to achieve a “soft landing.”

On February 28, Wall Street Journal reporter Nick Timiraos, known as the “New Federal Reserve News Agency,” wrote that Federal Reserve Governor Christopher Waller (Christopher Waller) established a novel economic framework two years ago, showing how the Federal Reserve can maintain a low unemployment rate while pulling the inflation rate back to the 2% target.

Today, two years later, as the US inflation data gradually approaches 2%, and the unemployment rate is still at a low point for nearly half a century, Waller's view of a “soft landing” seems quite “prescient.”

Timiraos believes that Waller's massive victory in the “Beveridge curve dispute” (the cooling of the labor market was achieved to a greater extent by reducing job vacancies, thereby preventing the unemployment rate from being significantly affected) established Waller's influence within the Federal Reserve.

Timiraos said bluntly that some analysts believe that as a US Federal Reserve policy official “appreciated” by Trump, if Trump is re-elected as US President, Waller may succeed current Federal Reserve Chairman Powell (his term will end in May 2026) as the next Federal Reserve Chairman.

Regarding the Fed's next move, Waller said in his latest speech that the January CPI and PPI both exceeded expectations, and the Fed should not rush to cut interest rates, but he still believes that the Fed will start cutting interest rates later this year. Waller said:

The strong economic data and the inflation data we have recently received mean that the Federal Reserve needs to be patient and cautious and think carefully about every decision. What is the hurry? I see no reason to act as quickly or cut interest rates as quickly as in the past.

Waller is “appreciated” by Trump

Timiraos believes that Waller's education and career have been very exciting. As the first child in the family to go to college, Waller initially chose to study certified accounting and business at Bemidji State University.

After inadvertently receiving suggestions from an economics professor, Waller changed direction and switched to the field of economics. In the first economics exam, Waller's results were not ideal; he only obtained a D grade, but at the end of the semester, Waller progressed rapidly and achieved the highest rank in one fell swoop. Since then, he chose to continue his studies, successively obtained doctorates in economics, and taught at the University of Notre Dame in the US.

In 2009, Waller began serving as Executive Vice Chairman and Head of Research at the St. Louis Federal Reserve. His main research fields are monetary theory, political economy, and macroeconomic theory.

Timiraos pointed out in the article that in 2019, then-US President Trump was dissatisfied that the Federal Reserve did not cut interest rates quickly. Since it was difficult for Trump to get the Senate to approve one of his nominated board members, White House chief economic adviser Larry Kudlow sought advice from then-St. Louis Federal Reserve Chairman James Bullard, who recommended Waller:

Waller once wrote an article praising economists that the Federal Reserve should be independent of the White House, but he was able to ease potential differences during his meeting with Trump, which left a deep impression on Trump.

Kudlow commented on Waller's performance at this conference, calling him a “true gentleman”. Waller not only successfully demonstrated his professional ability and independence, but also had a unique art of communication.

Trump first announced his nomination of Waller as a member of the Federal Reserve in July 2019, but this nomination was not finally approved in the Senate until Trump left office, and Waller was also considered the last US Federal Reserve decision maker to be “supported” by Trump.

Waller's “Beveridge Curve” controversy

Timiraos believes that the most important reason Waller's influence within the Federal Reserve actually increased was that he rejected traditional economic theories and used US economic data to prove that former Treasury Secretary Larry Summers and others were wrong.

In 2022, Waller, former International Monetary Fund chief economist Olivier Blanchard (Olivier Blanchard), and Larry Summers (Larry Summers) had a heated debate on “whether America can overcome inflation and avoid a real recession”. The core of the controversy was the “Beveridge curve” (a curve reflecting the empirical relationship between job vacancy rates and unemployment rates).

Olivier Blanchard (Olivier Blanchard) and former Treasury Secretary Larry Summers (Larry Summers) wrote a joint article stating that there has been no period in US history where the job vacancy rate has declined significantly while the unemployment rate has not increased significantly. In other words, the decline in the vacancy rate will be accompanied by a sharp increase in the unemployment rate.

However, according to Waller's analysis, the Beveridge curve is unstable. A soft landing will depend on the slope of the Beveridge curve and the company's avoidance of mass layoffs. Waller's theory is that in a hot labor market, tight monetary policies will make companies tend to slow down recruitment rather than dismiss employees, which is contrary to standard economic theory:

Based on the assumptions approved by the Federal Reserve about the current level of matching efficiency and the efficiency of the Beveridge curve, a drop in the job vacancy rate from 7% to 4.6% would cause the unemployment rate to rise by about 1 percentage point or less. The unemployment rate will remain below 5%, which is in line with the prospects for a soft landing.

Timiraos believes that Waller's statements have always been more “hawkish,” and he is more concerned about the continuation of high inflation than the emergence of a high unemployment rate. One reason is that under his economic framework, there may be a situation where there is no high unemployment rate and a reduction in inflation.

Editor/Somer