• Federal Reserve Governor Christopher Waller does not foresee a recession but acknowledges a significant economic slowdown, with H1 2025 GDP growth at just 1.4%.
  • Despite headline inflation being near the 2% target, a deteriorating labor market and subdued growth have strengthened the argument for cutting the policy rate.
  • Waller and other forecasters now contend that the current policy rate is above neutral and should be reduced to support the economy, with real GDP expected to remain below 1.4% for the rest of the year.

In a notable shift from earlier optimism, Federal Reserve Governor Christopher Waller stated that while a recession is not on the horizon, the U.S. economy is experiencing considerably slower growth, reinforcing his call for a more accommodative monetary policy stance. The remarks, delivered in a recent August speech, point to a marked deceleration in economic activity for 2025 compared to the previous year.

Waller’s assessment is grounded in hard data, notably a first-half GDP growth rate of just 1.4%. More concerning, however, are the emerging cracks in the labor market. Recent revisions to payroll data have been significant, with the three-month average now suggesting that employment may have actually contracted during that period. This weakening, according to people familiar with the matter, is a primary factor behind the growing consensus at the Fed that the current policy rate is restrictive and above a neutral level.

“The data we have seen in recent months paints a picture of an economy that is cooling,” Waller said, according to prepared text from his address. He maintained that with headline inflation hovering near the Fed’s target, the focus can rightly shift to supporting growth and employment. Several forecasters, including those from the University of Michigan, now expect real GDP growth to remain in the 1.0% to 1.3% range for the remainder of 2025, well below the committee’s long-run estimates.

The call for rate cuts, potentially starting with a 25 basis point reduction, comes amid a mixed backdrop. Business and household balance sheets are still generally described as healthy, allowing for sustained spending. However, surveys indicate a growing caution among businesses, with activity markedly slowing since December 2024. This has led some firms to delay hiring and investment decisions, creating a feedback loop that further dampens growth.

Administration policies, including recent tariffs, have introduced another layer of complexity. Waller characterized the resulting price level increases as temporary, stating the Fed would “look through” such effects as they are not seen as persistent drivers of underlying inflation. The greater concern remains the organic softening of the domestic economy.

The immediate future now hinges on incoming data. If the current softness in the labor market and GDP growth persists, a rate cut appears increasingly likely. The full picture of the job market may not be clear until government data revisions are completed in September and again next spring. For now, the Fed is signaling a readiness to act to cushion the slowdown, even as it reiterates that a full-blown recession is not the base case.