Fed Governor Christopher Waller signaled Thursday he would support keeping interest rates steady at the September meeting if August inflation data aligns with recent improvements, but warned of potential rate hikes if trends reverse.
Federal Reserve Governor Christopher Waller delivered a measured message on Thursday, indicating he would lean toward keeping interest rates unchanged at the central bank’s September meeting provided inflation data continues to show progress.
Waller’s Conditions for Stability
Waller’s stance hinges on the trajectory of inflation, particularly the August data due in early September. If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,
Waller said during a Reuters interview, citing recent improvements in both headline and core inflation metrics.
The Fed’s preferred inflation gauge, the three-month personal consumption expenditures (PCE) price index, has fallen from 4.76% in February to 3.05% as of July, a decline Waller called “considerable.” He attributed part of the slowdown to nonmarket services prices
and upcoming revisions to the PCE calculation that could further lower readings.
Market Reaction and Policy Uncertainty
Traders reacted swiftly to Waller’s comments, driving down the probability of a rate hike at the September 15-16 meeting to 54.6%, down 12 percentage points from prior levels, according to the CME Group’s FedWatch tool. The shift reflected growing confidence in disinflationary trends, though Waller emphasized the fragility of the outlook.
Fed Governor Waller indicates he will support holding rates
I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy,
he said. If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes.
Contrast with Warsh’s Hawkish Tone
Warsh’s speech at the Jackson Hole symposium had framed inflation as a work in progress, a view Waller partially echoed but tempered with optimism. The underlying trends are actually better than the core numbers suggest,
Waller said, adding that annual inflation figures are not the best guide for where inflation is today.
What Comes Next: The August Data Test
The Fed’s next major data points are the August consumer price index (CPI) and producer price index (PPI), scheduled for release in early September. Waller’s decision will rest heavily on these reports, which could either reinforce his confidence in disinflation or prompt a shift toward tightening.
What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%,
Waller said, invoking a paraphrased line from John Lennon. Give disinflation a chance. We can wait one meeting.
With markets now pricing in a less than 54.6% chance of a rate hike, the focus turns to the August data. A reversal in inflation trends could reignite calls for tighter policy, but for now, Waller’s cautious optimism has given the markets a reprieve.
Uncertainty Over External Factors
Waller also highlighted uncertainties surrounding external factors, including military conflicts, trade policy, and artificial intelligence, which could influence the economy. If inflation comes in hot, I would consider a rate hike,
he said, emphasizing the unpredictability of these variables.
Prior Rate Decisions and Policy Context
The Fed held rates steady in July, but three officials voted to raise rates, reflecting internal divisions on the appropriate policy path. Waller’s comments suggest a preference for caution, aligning with the broader Fed strategy of monitoring data before making significant adjustments.
Revisions to the PCE Calculation
Revisions to the way the Bureau of Economic Analysis computes the personal consumption expenditures price index are expected to take inflation readings issued earlier this year lower. These adjustments, while not yet implemented, could further alter the inflation narrative in the coming months.
Waller’s Focus on Disinflation
Fed's Waller sees case for steady rates if inflation
Waller emphasized that recent trends suggest we are finally seeing some signs of disinflation.
He noted that while inflation remains meaningfully above
the Fed’s 2% target, the pace of decline in the three-month PCE rate is “encouraging.” This perspective underscores his belief that patience could yield more favorable outcomes.
Conditional Policy Outlook
Despite his optimism, Waller cautioned that his position remains conditional. If there are any indications between now and the meeting, I could change course,
he said, acknowledging the Fed’s limited data window before the September 15-16 meeting. The only major inflation reports the Fed will receive are the CPI and PPI from the Bureau of Labor Statistics.
Market Implications and Analyst Perspectives
However, the Fed’s dual mandate of price stability and maximum employment continues to shape its approach, with inflation remaining the primary concern.
Looking Ahead
As the Fed awaits the August data, the balance between caution and responsiveness will be critical. Waller’s comments suggest a willingness to wait for more evidence before acting, but the central bank remains vigilant to any signs of inflationary pressures. The upcoming CPI and PPI reports will be pivotal in determining the Fed’s next steps.
The evolving inflation landscape and the Fed’s policy response will continue to shape market expectations and economic outcomes in the months ahead.
