As the Federal Reserve continues to navigate the post-pandemic economic landscape, the conversation has shifted decisively from rate hikes to rate cuts. Recent commentary from Fed Governor Christopher Waller offers insight into what could be a surprisingly proactive monetary policy pivot — one driven not by fear of recession, but by optimism about inflation trends and labor market resilience.

A New Era of “Good News” Rate Cuts

In a notable shift in tone, Waller said he would support interest rate cuts later this year — not because the economy is weakening, but because inflation appears to be coming under control. Speaking in late May, Waller said, “I would be supporting ‘good news’ rate cuts later this year”, provided that tariffs remain moderate and both inflation and unemployment data stay within healthy ranges.

This opens the door to a different type of monetary easing — one that reflects economic strength rather than fragility.

Reading Between the Lines: September, October, and December

Based on the data trajectory and Waller’s remarks, markets are now anticipating three potential rate cuts of 25 basis points (bps) each, spaced across the September, October, and December Federal Open Market Committee (FOMC) meetings. While nothing is guaranteed, this aligns with the Fed’s current dual mandate: price stability and maximum employment.

More than likely, we cut 25 bps at each of those meetings.

This sequencing — cutting incrementally while inflation is trending downward — suggests a deliberate strategy to normalize interest rates without shocking the system. The Fed seems poised to move carefully, rather than reactively, with the primary goal of sustaining growth while maintaining control over inflation.

Why These Cuts Could Be Different

Historically, interest rate cuts have been viewed as emergency measures, implemented to fight off recessions or market turmoil. But if inflation continues to ease while job growth remains stable, the upcoming rate cuts could mark a rare instance of “preemptive normalization.”

That means:

• Inflation is no longer a threat: Recent CPI and PCE data show core inflation gradually cooling, approaching the Fed’s 2% target.
• Labor markets are holding firm: Unemployment remains near historic lows, and job creation continues at a modest but steady pace.
• Consumer sentiment is rebounding: Lower rates could boost confidence just as election season ramps up.

If these trends continue, Waller’s vision of good-news rate cuts could become the dominant narrative heading into Q4 2025.

The Bigger Picture: What This Means for Markets

A series of rate cuts in the back half of the year would carry significant implications for financial markets, businesses, and consumers:

1. Equities

Lower borrowing costs typically support higher equity valuations. Sectors like tech and real estate could benefit, especially if the cuts are seen as confidence-boosting rather than panic-driven.

2. Fixed Income

Bond yields may decline as expectations for future interest rates adjust. This could result in price gains for Treasuries and investment-grade corporate bonds.

3. Credit and Housing

Mortgage rates and other consumer borrowing costs could decline, giving a much-needed boost to the housing market and consumer spending, which has been constrained by high credit card APRs and auto loan rates.

4. The Dollar

A dovish Fed could weaken the U.S. dollar, particularly against currencies backed by more hawkish central banks. This would have ripple effects across trade and commodities.

Political and Global Risks Still Loom

Despite the upbeat trajectory, some caveats remain. Tariff levels, as Waller noted, are a key wildcard — especially with U.S.–China tensions and election-related policy shifts on the horizon. Increases in tariffs could reaccelerate inflation, forcing the Fed to stall or reverse cuts. Similarly, geopolitical shocks or an unexpected labor market decline could derail this carefully calibrated path.

A “Soft Landing” With a Soft Touch

The Fed appears to be embracing a rare opportunity to cut interest rates into strength. If Waller’s forecast holds true, and inflation continues to drift lower while the labor market stays resilient, we may see a return to more normalized monetary policy by the end of 2025.

Three cuts — in September, October, and December — would mark a gentle descent from the peak of the rate-hiking cycle, giving businesses and households room to breathe, while cementing the Fed’s credibility in managing inflation without triggering a recession.

The stage is set. Now, it all depends on the data.