Federal Reserve Governor Christopher Waller indicated he would support holding interest rates steady at the upcoming Federal Open Market Committee (FOMC) meeting on September 15 and 16, provided that August inflation data continues to show disinflationary trends. This stance led to a significant market reaction, with stocks and bonds rising, and the dollar weakening. The S&P 500, Dow Jones Industrial Average, and Nasdaq Composite all saw gains exceeding 1%.
Waller's comments created a notable shift in market expectations. The probability of a September rate hike, as indicated by the CME FedWatch tool, dropped to 50.2% from 63.2% the previous day, effectively splitting market sentiment between a hike and a hold. This contrasts with a more hawkish stance expressed by Chairman Kevin Warsh earlier, highlighting growing uncertainty in the Fed's monetary policy trajectory.
The bond market also reacted, with the yield on the 10-year Treasury note falling by 0.022 percentage points to 4.772%. The 2-year yield, sensitive to monetary policy, decreased by 0.046 percentage points to 4.340%. Investors are now keenly awaiting the August employment report, due out on September 4, and more crucially, the August inflation data, particularly the CPI and PPI, to be released on September 10 and 11. Waller emphasized that his decision would be "heavily influenced" by the August inflation figures, and a "hot" inflation report could still prompt him to consider a rate hike, as he believes current policy is only "slightly restricting aggregate demand."
Despite the immediate market relief, uncertainty remains high due to varying opinions among Fed officials and external factors such as military conflicts, trade policy, and artificial intelligence, which Waller noted could affect prices and economic activity. The upcoming data releases are expected to be pivotal in shaping the Fed's next steps and market direction.
