Fed's Waller Sees Scope for More Rate Hikes if Inflation Progress Stalls

Federal Reserve Governor Christopher Waller said additional interest-rate increases may be needed if incoming data continue to align with expectations, arguing that further tightening could bring inflation back to the Fed's 2% goal sooner. Waller said any hikes would not need to come at consecutive meetings, but should be delivered within a reasonable timeframe. He noted the Federal Open Market Committee (FOMC) raised the policy rate by 25 basis points to a 3.75%–4% range in September after nine months of no changes, and said the decision was supported by several months of evidence rather than a single August consumer price index report. Looking back, Waller said the FOMC cut rates by a total 75 basis points across three straight meetings from September through December 2025. He described those reductions as insurance against a slowdown as unemployment rose and job growth was very weak. On inflation, Waller said it was fairly close to 2% after accounting for tariff effects that research suggests were feeding through into inflation measures. He added that other indicators supported an employment-focused assessment of risks after the government shutdown that began Oct. 1 disrupted official data releases. Waller said the labor market appeared to stabilize in the first half of this year, while the Middle East conflict pushed energy prices sharply higher and partly stalled progress on inflation. He said he supported holding rates steady through spring and summer, expecting the conflict to ease and the oil spike to prove temporary. He cited cooling inflation in the Fed's preferred gauge: monthly core personal consumption expenditures (PCE) inflation, excluding food and energy, slowed to 0.1% in June. July core PCE was first estimated at 0.2% and later revised down to 0.1%. Waller also pointed to risks that could keep inflation elevated. He said experts have warned that low oil inventories and damaged infrastructure could keep oil prices high through 2027 as prospects for a quick resolution to the conflict faded. He said evidence is mounting that the artificial-intelligence buildout has materially lifted high-tech consumer prices as expectations for the scale of that investment expand. He added that ongoing trade disputes raise the risk of new tariffs that could reignite inflation pressures. Waller said the first August inflation reading, released shortly before the September meeting, confirmed inflation remained too high and had not improved enough. In his view, the policy stance maintained from December 2025 through September of this year would not return inflation to 2% on a timely basis. He said stronger economic activity in the second half of this year has reduced his concern that tighter policy would trigger a damaging slowdown. At the same time, he warned that inflation running above target for nearly five and a half years risks lifting inflation expectations among consumers, investors and price-setting businesses. Waller said data released last week left the economy broadly in the same place as at the September FOMC meeting. September employment data, he said, still pointed to a solid and stable labor market despite a slower headline pace of job creation. Unemployment remained relatively low and close to policymakers' median longer-run projection, while payroll gains were consistent with estimates needed to hold unemployment steady. He said August data, reflecting revisions to the government's methodology, showed monthly core PCE inflation of 0.25%. The 12-month core PCE inflation rate was 3%. He added that 12-month core inflation has hovered roughly between 2.5% and 3.0% since spring 2024, showing insufficient progress toward the target, and said monetary policy would remain focused on inflation at least in the near term. On communication, Waller laid out a hypothetical path involving three 25-basis-point hikes, totaling 75 basis points. He argued that saying nothing about an expected path could increase volatility, with markets potentially pricing anywhere from zero to five hikes and producing either too little or too much restraint. He said strong forward guidance pointing to 25-basis-point hikes at every other meeting would likely lead markets to price 75 basis points over five meetings. Still, he cautioned that locking in such a course could backfire by ignoring data that could warrant faster or slower tightening, or larger or smaller moves. Waller said a better approach would be to signal that a roughly 75-basis-point increase over an illustrative six-month period is likely, while keeping the pace and size of hikes dependent on incoming data. He said the intent is to communicate direction without fixing an endpoint beyond the goals of price stability and maximum employment. He added that Fed communications and the quarterly Summary of Economic Projections play this signaling role. In September's projections, he said, 16 of the 18 FOMC participants who submitted rate forecasts expected at least one additional hike across the year's two remaining meetings, and four of those 16 expected two hikes. Eight participants projected that rates at the end of 2027 would be 50 basis points higher than current levels, though Waller said those forecasts could also reflect hikes early in the year followed by cuts later. Waller said markets have read policymakers' projections and speeches as pointing to a likely 50-basis-point increase in coming months. He said federal funds futures pricing as of yesterday implied an 85% chance of at least one hike by the end of the December meeting and close to a 20% chance of two hikes by then. By the March 2027 meeting, he said markets were pricing nearly an 80% chance of at least two hikes and a 33% chance of three or more.