Federal Reserve Governor Christopher Waller said Thursday he is prepared to leave the federal funds rate where it is when policymakers meet on Sept. 15 and 16. But that patience has a condition: the recent cooling in inflation needs to hold up for the next two weeks.
Speaking at a Reuters NEXT newsmaker interview in Washington, Waller made it clear that the bar for holding rates is continued progress toward the Fed's 2% target. If August inflation comes in hot, he said a tightening step would be on the table.
What Waller Said About Inflation
"If there is continued progress toward our 2 percent goal, then I am willing to support holding the policy rate at its current level," Waller said. "But if inflation comes in hot, I would consider a rate hike."
Waller's argument centers on the three-month run rate rather than the annual figures. Core inflation measured over the three months through July stood at 3.05%, still well above the 2% goal. But that reading has fallen steadily from 4.76% in February, and Waller called the speed of that descent encouraging.
The 12-month numbers look worse. Personal consumption expenditures prices are up 3.7% over the past year and core PCE is running at 3.3%, above target for five and a half years now. Waller pushed back on reading those annual figures as current conditions.
He also singled out nonmarket services prices, which are imputed rather than observed, and which accounted for roughly half of July's core increase. Strip that out, he said, and underlying inflation looks better than the headline core reading suggests.
A pending Commerce Department revision to how it estimates fees paid to stock market traders could shave a few tenths off 12-month PCE inflation on its own.
The Economy Is Not The Constraint
Real gross domestic product grew at a 1.8% annual rate in the first half. Real private domestic final purchases, the cleaner read on underlying demand, rose 3%. Job creation has averaged 60,000 a month through July and unemployment sits at 4.1%. Waller expects growth a bit above 2% for the full year.
On the AI capital expenditure boom, Waller rejected the argument that data center spending artificially props up GDP. He said the investment is a legitimate part of output and expects the technology to remain central to the economy after the buildout peaks.
What Could Flip Him
Waller described policy as only slightly restrictive right now, which is the tell. "It may not take much acceleration in inflation," Waller said, to push him toward tightening.
That leaves the August consumer price index as the swing input for investors positioned through the SPDR S&P 500 ETF Trust (SPY) and the Invesco QQQ Trust (QQQ), and for duration exposure through the iShares 20+ Year Treasury Bond ETF (TLT).
Waller closed by endorsing Chairman Kevin Warsh's position that forward guidance is not appropriate in the current environment, while defending its use at the effective lower bound.
On Thursday, the yield on the 10-year Treasury was down 4 basis points to 4.76%. Fed futures are currently pricing in a 51% chance of a September rate hike, according to CME FedWatch.
