Federal Reserve Governor Christopher Waller announced that his decision on interest rates for the upcoming September Federal Open Market Committee (FOMC) meeting will be significantly influenced by the August inflation data, due next week. Waller stated that he is inclined to support holding the federal funds rate at its current level if the August data continues to show progress towards the Fed's 2% inflation goal. However, he cautioned that if inflation "comes in hot" or shows a reversal in disinflationary progress, he would consider a rate hike, as policy is currently only slightly restricting aggregate demand.
Waller noted that while headline Personal Consumption Expenditures (PCE) inflation is at 3.7% and core PCE inflation is at 3.3% over the past 12 months, the three-month core inflation rate has fallen steadily from 4.76% in February to 3.05% through July. He emphasized that the underlying inflation trends are "better than the core numbers suggest" and that the 12-month figures are not the best guide for current inflation, attributing some of the reported increase to imputed nonmarket services prices. He also mentioned a pending change in how the Commerce Department estimates certain nonmarket prices could lower 12-month PCE inflation by a few tenths of a percentage point.
His remarks led to a sharp decline in market-implied odds for a September rate hike, with traders now pricing in just a 48.4% probability, down approximately 15 percentage points from the previous day. This sentiment shift caused stocks and bonds to rise. Waller's comments appear to contrast with statements from Chairman Kevin Warsh last week, as Waller expressed confidence that tariff impacts have been muted and higher energy prices have not substantially affected other parts of the economy, advocating to "give disinflation a chance."
Waller highlighted that the labor market is stable and employment is near its maximum sustainable level. He stressed that while inflation remains meaningfully above the 2% target, recent data indicates "finally seeing some signs of disinflation." The upcoming consumer and producer price indexes, which feed into the Commerce Department's PCE price index, will be crucial in determining his stance for the September meeting.
