Federal Reserve Governor Christopher Waller has stated that the upcoming August inflation data will "heavily influence" his decision regarding an interest rate hike in September. While he sounded close to supporting a rate increase in prepared remarks, he later tempered these comments by expressing an expectation that the inflation data would come in at a "reasonable" level. This suggests that a potential rate hike is not a certainty and will largely depend on whether inflation continues to cool.
Waller's remarks indicate a shift in focus for the Fed, with core inflation numbers, specifically the August CPI report due next week, taking precedence over jobs data. Previously, the nonfarm payrolls report held significant sway, but Waller has effectively communicated that August CPI will get the "deciding vote." This means that even an ordinary beat in the jobs report may not secure a rate hike if inflation data is favorable.
Market participants have responded by treating the September Fed decision as a near 50-50 proposition between a pause and a hike. Investors are urged to "give disinflation a chance." While a very weak nonfarm payrolls number could lead to a pause, a stronger number does not guarantee a hike. The stakes are high, with some economists modeling PCE inflation to three decimal places. If inflation continues to slow, Waller would be inclined to keep rates unchanged; however, if inflation comes in hot, he would consider a rate hike, noting that current borrowing costs are only "slightly restricting" demand.
Other Fed officials, including Fed Chair Kevin Warsh and New York Federal Reserve Bank President John Williams, have also expressed views on inflation. Warsh previously suggested that inflation had not shown sufficient improvement, indicating a potential rate increase, which led to increased bets on a hike. Williams, however, has been encouraged by recent inflation data and is willing to wait and see if it continues to decline, suggesting he would also be open to keeping rates steady this month.
Overall, the market is now primarily focused on next week's CPI and PPI releases, viewing them as the decisive variables for the Fed's September meeting. The median forecast for August payrolls is a 56,000 increase, with the unemployment rate projected to remain at 4.1% (with a 4.2% risk). Asian markets saw gains, oil prices held near six-week highs at $95.52 a barrel, and the yen strengthened by about 2.5% to 156 per dollar.
