Federal Reserve Governor Christopher Waller announced that his stance on interest rates for the upcoming September Federal Open Market Committee meeting will be "heavily influenced" by the August inflation data, which is due next week. While his prepared remarks hinted at a potential rate increase, he later tempered these comments during a Q&A session, expressing an expectation for the inflation data to be at a "reasonable" level. This suggests that if disinflationary trends persist, he would be inclined to support maintaining the current federal funds rate.
Waller's comments had an immediate impact on financial markets. Stocks experienced a rise and bond yields decreased as market participants adjusted their expectations for a Fed rate hike. This shift in sentiment was driven by Waller's indication that he would be willing to support holding rates steady if signs of easing price pressures continue, a sentiment that contrasted with recent hawkish remarks from Chairman Kevin Warsh. The market-implied odds for a rate hike at the September 15-16 meeting dropped sharply by approximately 15 percentage points to 48.4% following Waller's statements.
Despite acknowledging that inflation remains "meaningfully above" the Fed's 2% target, Waller highlighted that recent data points to "signs of disinflation." He noted that the three-month core inflation rate, using the Fed's preferred Personal Consumption Expenditures (PCE) index, has decreased from 4.76% in February to 3.05% in July, calling this a "considerable improvement" and the speed of this downward trajectory "encouraging." However, he cautioned that if August inflation data shows a reversal of this progress, he would consider a rate hike, viewing current policy as only "slightly restricting aggregate demand."
Waller emphasized that specific inflation reports, such as the consumer and producer price indexes, will be crucial in shaping his decision. He also downplayed the impact of energy prices and tariffs on ongoing inflation, stating that their price effects have largely passed. His remarks provided a more dovish outlook compared to Chairman Warsh's recent statements at Jackson Hole, where Warsh expressed less confidence in recent softer monthly inflation readings and indicated that more work might be needed to address underlying trends.
