Federal Reserve Governor Christopher Waller announced that his decision on interest rates for the upcoming September meeting will be significantly influenced by the August inflation data, due next week. He stated that if there is continued progress toward the Fed's 2% inflation target, he would be inclined to support maintaining the current policy rate. This dovish stance suggests a potential pause in rate hikes, provided inflation continues to cool.
Waller's comments spurred a positive reaction in the markets. Wall Street's main indexes opened higher, with the Dow Jones Industrial Average rising 394.74 points (0.74%) to 53,456.69, the S&P 500 gaining 41.29 points (0.54%) to 7,707.89, and the Nasdaq Composite increasing by 160.20 points (0.61%) to 26,378.03. Traders responded by lowering their bets on a rate hike, reducing the dollar's interest-rate advantage and leading to a weaker dollar.
Despite the positive sentiment, Waller cautioned that borrowing costs might need to increase if inflation data indicates persistent price pressures. He noted that while core PCE inflation is 3.3% over the past 12 months, the three-month core inflation has steadily fallen from 4.76% in February to 3.05% in July, an encouraging sign of disinflation. However, he emphasized that if August inflation data comes in "hot," he would consider a rate hike, viewing the current policy as only slightly restricting aggregate demand.
Investors are now closely watching upcoming economic reports, particularly Friday's jobs data and the crucial August inflation data, which Waller highlighted as pivotal for his September rate decision. Geopolitical risks, such as a prolonged conflict in the Middle East and rising Brent crude futures (up 0.49%), also pose potential inflationary headaches that could complicate the rate outlook.
