How today's speech from Waller could turn around the market

<p>The highlight of the economic calendar today is an 11 am ET (1600 GMT) speech from Federal Reserve Governor Christopher Waller.</p><p>In November, he supercharged Fed rate-cut expectations when he <a href="https://www.federalreserve.gov/newsevents/speech/files/waller20231128a.pdf" target="_blank" rel="nofollow">said</a>:</p><p>"I am encouraged by what we have learned in the past few weeks—something
appears to be giving, and it’s the pace of the economy"</p><p>He added that there are good arguments that if inflation continues falling for several more months that you could lower policy rate.</p><blockquote>In inflation continues falling “for several more months — I don’t know how long that might be — three
months, four months, five months — that we feel confident that inflation
is really down and on its way, you could then start lowering the policy
rate just because inflation is lower."</blockquote><p>The market clearly thinks that March is enough, with a 75% chance of a cut priced in, and one-and-a-half cuts priced in by May.</p><p>Waller has also positioned himself as a key message-sender ahead of FOMC meetings. The timing of today's speech isn't an accident as it comes just a few days before Friday's blackout. That's a good time to send markets a steer while leaving some room for a course correction if he misspeaks.</p><p>Critically, there isn't much else on the Fed calendar this week.</p><ul><li>Tuesday, Jan 16<ul><li>11:00: Fed's Waller Speech</li></ul></li><li>Wednesday, Jan 17<ul><li>09:00: Fed's Bowman Speech</li><li>09:00: Fed's Barr Speech</li><li>14:00: Fed's Beige Book Report</li><li>15:00: Fed's Williams Speech</li></ul></li><li>Thursday, Jan 18<ul><li>07:30: Fed's Bostic Speech</li></ul></li><li>Friday, Jan 19<ul><li>16:15: Fed's Daly Speech</li></ul></li></ul><p>How it could impact the market</p><p>The mood today in the market is hawkish, with yields up, stocks down and the dollar higher.</p><p>To me, that signals a market that is jittery that Waller will push back on expectations for rate cuts in March. That's especially prescient after <a href="https://www.forexlive.com/news/us-december-core-cpi-39-yy-versus-38-yy-expected-20240111/" target="_blank" rel="follow">last week's hotter US CPI</a>.</p><p>The Fed may once again have decided to redouble its efforts to completely snuff out inflation rather than continuing to play with inflationary fire. To be fair, that's a reasonable strategy.</p><p>However it's not one the Fed has hinted at and I don't think it's coming today. Instead, I wouldn't be surprised if Waller <a href="https://www.forexlive.com/centralbank/feds-barkin-labor-market-fees-like-its-moving-in-a-steady-softening-pattern-20240105/" target="_blank" rel="follow">follows Barkin</a> in highlighting how a 'toggle' in rates below 5.50% would leave the Fed still in a restrictive place but without overly risking growth.</p><p>If he does talk more about cutting rates, the dollar strength and equity weakness today could quickly reverse.</p>

This article was written by Adam Button at www.forexlive.com.