Will Federal Reserve hike rates later this month? Waller muddies the outlook

WASHINGTON (AP) — Federal Reserve governor Christopher Waller said Thursday that an inflation report next week will largely determine whether he supports an interest rate hike later this month or not.

The government will release August inflation figures Sept. 11, and if that report shows inflation continues to cool, then Waller said he “would be inclined” to keep the Fed’s benchmark interest rate unchanged.

“But if inflation comes in hot, I would consider a rate hike,” Waller said. Borrowing costs are only “slightly restricting” consumer and business demand, he added, “and it may not take much acceleration in inflation to nudge me into supporting” a rate hike.

Waller is an outspoken member of the Fed’s seven-person governing board, and his remarks suggest that a rate hike later this month is not a done deal. Stock prices rose and bond yields fell in response. Several members of the Fed’s rate-setting committee have voiced concerns that price increases are still too high, suggesting that a rate hike may be needed. Yet others have said inflation is slowly cooling and higher borrowing costs aren’t necessary.

Fed Chair Kevin Warsh said last week at the Fed’s annual economic symposium in Jackson Hole, Wyoming, that inflation had not shown sufficient improvement and that the central bank might have “more work to do,” a sign he is weighing a rate increase at the Fed’s next meeting Sept. 15-16.

Warsh’s speech last Friday contributed to the steady rise of longer-term bond yields this week that has caught the attention of policymakers and Wall Street investors, and that has lifted mortgage and auto loan rates for consumers. Investors raised the odds of a rate hike in September to nearly 65% by Wednesday, according to CME Fedwatch.

After Waller’s comments, the odds fell to roughly 50-50.

Waller suggested he has been encouraged by signs that inflation had slowed over the past two months. According to the Fed’s preferred gauge, prices ticked down 0.1% from May to June and rose just 0.2% from June to July. At that pace, inflation would move much closer to the Fed’s 2% annual target.

September’s meeting “is going to be knife edge and it’s going to come down to how the CPI data prints,” Joseph Purtell, portfolio manager at Neuberger, said, referring to the government’s primary measure of inflation, the consumer price index.

Still, Vice President JD Vance on Thursday reiterated the Trump administration’s view that the Fed should actually cut its benchmark rate, rather than raise it or keep it unchanged.

“Our view, and this has been a consistent message from the president and the rest of the administration on down, is that we believe that the Fed should be lowering interest rates,” Vance said at a White House briefing. “We feel quite confident that if you look at the inflation numbers, if you look at the CPI numbers, that it’s proper and responsible for the Federal Reserve to lower interest rates.”

Warsh has sought to cut back on the signals the Fed sends about its next moves, which he argues limit the central bank’s policy flexibility. As a result, there has been more uncertainty going into Fed meetings about what policymakers will do than in the past.

Purtell said Warsh could probably command a majority in favor of either keeping rates unchanged later this month or raising them.

Last month, the government said inflation stayed at 3.7% on a yearly basis, according to the Fed’s measure.

In an interview with Reuters following his remarks, Waller acknowledged he is heavily focused on one upcoming report. But he said looking at near-term data is necessary to pick up on any changes in trends.

“I’m willing to sit and wait and be patient” to see if the next inflation report also shows it declining, Waller said. “But if it reverses, then you know it’s time to pull the trigger and hike rates.”

On Wednesday, John Williams, president of the Federal Reserve Bank of New York, said he has also been encouraged by recent inflation data but would like to see more evidence that it is declining, suggesting he would also be willing to keep rates steady this month.

“I think that we have to wait and see,” Williams said in an interview on CNBC. “There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”