Federal Reserve President Christopher Waller said Thursday that he is leaning toward keeping interest rates on hold at the central bank’s September meeting unless there are surprises in future inflation data.
In remarks that appeared to be in contrast to Chairman Kevin Warsh’s comments last week, Waller expressed confidence in current inflation trends, saying the impact of tariffs is likely contained and that rising energy prices have not had a significant impact on other parts of the economy.
He acknowledged that inflation is “well above” the Fed’s 2% target, but noted that recent trends “suggest that we are finally starting to see signs of deinflation.”
“If this situation persists based on indicators released over the next two weeks, I would support keeping the federal funds rate target at its current setting,” Waller told Reuters in an interview.
The market’s implied probability of a rate hike at the Sept. 15-16 meeting fell sharply following the comments, with traders now pricing the probability at 48.4%, down about 15 percentage points from Wednesday, according to CME Group’s FedWatch index.
“I’m going to paraphrase John Lennon here: Give inflation a chance. We can wait for a meeting,” Waller said. “What is the cost of waiting for one meeting? If we raise the rate by 25 basis points now and have one meeting, the CPI will not fall to 2%.”
The policymaker added a caveat, saying any indication between now and the meeting could change course.
“We judge that policy is only marginally restricting aggregate demand at this point, so it may not take much of an acceleration in inflation to encourage support for tighter policy,” Waller said. “If there is evidence that progress towards 2% inflation has reversed in August, a small adjustment to our stance would ensure that inflation resumes.”
The only major inflation reports the Fed receives are the Consumer Price Index and Producer Price Index, which the Bureau of Labor Statistics will release next week. These two reports have a large impact on the Commerce Department’s Personal Consumption Expenditure Price Index, which the Fed uses as its main inflation indicator.
The remarks came less than a week after Warsh said in a speech at the Fed’s annual symposium in Jackson Hole, Wyoming, that the recent monthly slowdown in inflation “does not represent a meaningful improvement in the underlying trend.” If trends don’t cooperate, “we have work to do,” he added.
Although this statement was little different from the chairman’s previous statements on inflation, the market took it as a hawkish move on interest rates and quickly priced in the possibility of a rate hike at the next meeting.
But Waller took a different view.
He said that although headline inflation was 3.7% in July and core inflation was 3.3%, the underlying trend was actually “better than the core numbers suggest” and that the annual figures were “not the best indicator of today’s inflation situation”. He noted that three-month inflation, as measured by the Fed’s preferred indicator, is now 3.05%, down from 4.76% in February.
“This is a significant improvement and the speed of this downward trajectory is encouraging,” he said.
Waller said certain “non-market service prices” that are estimated rather than observed may be driving up inflation. In addition, the inflation rate announced earlier this year is expected to be even lower due to the Bureau of Economic Analysis’s revisions to the way it calculates the Personal Consumption Expenditure Price Index.
