Federal Reserve Governor Christopher Waller speaks during The Clearing House Annual Conference in New York City, U.S. November 12, 2024. REUTERS/Brendan McDermid

By David Milliken and Howard Schneider

LONDON (Reuters) -U.S. firms have begun talking more frequently about layoffs as they plan for weaker demand and possible productivity gains from artificial intelligence, Federal Reserve Governor Christopher Waller said in remarks that continued to build the case for further rate cuts amid a broad policy dispute at the U.S. central bank.

"Four to six weeks ago, we were still in this kind of no-hire, no-fire mode," Waller said in remarks to the Society of Professional Economists in London. Now, when he speaks to corporate executives, "they're starting to talk about layoffs," he said. "They're starting to plan for them."

"It could be AI-related. It could be a lot of other things ... It's not just going to be 'no hire, no fire.' At some point this is going to start happening," Waller said, urging the Fed to put more weight on risks to the job market and approve another quarter-point rate cut at the upcoming policy meeting on December 9-10.

Inflation, he argued, once excluding the likely temporary impact of tariffs, is perhaps less than half a percentage point above the Fed's 2% target and should decline further, with the economy at risk of slowing and many households, particularly those not benefitting from the recent rise in stock market gains, financially stressed.

Waller has been arguing for rate cuts for several months, and while many of his colleagues agreed until recently, opinion is now deeply split.

Several of the Fed's 12 regional reserve bank presidents in particular say they think the Fed should stop cutting rates because inflation has changed little in the last year and remains nearly a full percentage point above target. The Fed's vice chair, Philip Jefferson, said on Monday that while he agreed there was risk to the job market, the Fed should still "proceed slowly" with any further cuts.

Waller, under consideration by President Donald Trump as a possible chair, nodded to the unusually deep divide among policymakers right now. While he said dissent is healthy in an organization, policy votes that become too "razor-thin" could undermine the ability of investors to set accurate expectations about the path of interest rates.

"You might see the least groupthink you've seen from the FOMC in a long time," Waller said of the Fed's rate-setting committee, where 12 policymakers have a vote. "It doesn't mean anything about the chair's leadership ... The only problem is if it gets down to 7 to 5, then one person switches at the next meeting, the whole trajectory changes. That's kind of a danger ... It doesn't give people confidence" in the path of policy.

The Fed's current policy debate is being carried out in the absence of official government economic statistics delayed because of the recent 43-day government shutdown.

Waller said he felt the difficulties of that had been exaggerated.

The Fed was not "in a fog" that requires it to delay rate cuts until there was more clarity, he said. Rather, "we have a wealth of private and some public-sector data that provide an imperfect but perfectly actionable picture of the U.S. economy," he said, including information from private sources like payroll processor ADP, state government unemployment claims, and surveys from groups like the Conference Board and the University of Michigan.

That data, he said, shows the job market near stall speed, with state unemployment claims rising slightly, layoff numbers increasing, and no evidence of building wage pressures - facts that buttress the case for another interest rate cut, Waller said.

"The labor market is still weak and near stall speed," he said, while inflation outside of tariff impacts "is relatively close" to the Fed's 2% target.

"I am not worried about inflation accelerating or inflation expectations rising significantly," Waller said. "My focus is on the labor market, and after months of weakening, it is unlikely that the September jobs report later this week or any other data in the next few weeks would change my view that another cut is in order."

The shutdown delayed the release of core economic data, including the September jobs report that is due to be released on Thursday.

He said the drop in consumer sentiment and stress on families whose budgets are stretched by housing and other major costs point to slower economic growth.

"I worry that restrictive monetary policy is weighing on the economy, especially about how it is affecting lower- and middle-income consumers," Waller said. "A December cut will provide additional insurance against an acceleration in the weakening of the labor market and move policy toward a more neutral setting."

(Reporting by David Milliken in London and Howard Schneider in Washington; Editing by Paul Simao and Matthew Lewis)