“In that case, I think a 50 basis point hike in the policy rate should be considered at the December meeting,” he said. “An increase of just 25 basis points would jeopardize our credibility, and I don’t want to take that risk.”
The consumer price index for October released on Tuesday showed that headline prices rose 0.4% and core prices excluding food and energy rose 0.3%. Both were 0.1 points above the Dow Jones consensus. Traders then fully priced in a quarter-point rate hike in December, giving them a 12.5% chance of a half-point rise.
Waller said the market is already pricing in further rate hikes due to the Fed’s communications before and at its October meeting.
Waller added that the important thing is that rate hikes continue, even if they happen intermittently.
“If this communication is clear and reliable, what really matters is that the rate hikes will happen eventually. For example, there is no need to raise rates in successive meetings,” he said. “However, if a rate hike is not implemented, markets will likely back off on expectations for a rate hike, leading to an immediate fall in interest rates and an undesirable loosening of monetary policy.”
Waller added: “Sooner or later, we’re going to need higher interest rates.”
Dallas Fed President Rory Logan said late in the morning that the central bank expected two more quarter-point rate hikes before pausing to see how the rate hikes would affect the situation. The Fed approved a quarter-point rate hike in September.
In deciding not to raise interest rates in October, the FOMC said that “more information” would help guide the appropriate policy path to curb inflation. The decision was not unanimous, with Gov. Lisa Cook and Cleveland Fed President Beth Hammack opposing it.
Chicago Fed President Austan Goolsby said Monday that the Fed needs to be careful not to let the economy get too hot, “because once you get overheated, it’s very difficult to get that kind of overheating out.”
