Fed’s Waller Open to Holding Rates Steady at September Meeting

Fed Gov. Christopher Waller said that while inflation is still “meaningfully” above the Fed’s 2% target, he’s seeing signs of cooling in the recent data. (Kevin Dietsch/Getty Images)

Key Points

• Federal Reserve Gov. Christopher Waller said August inflation data will heavily guide his decision on whether to raise or hold interest rates.
• Waller said he would be inclined to support holding the federal funds rate steady if signs of cooling inflation continue in the upcoming data.
• Waller noted that global conflicts, trade policy, and artificial intelligence have boosted inflation this year and could do so again.

Federal Reserve Gov. Christopher Waller said Thursday that August inflation data will heavily guide his decision on whether to raise or keep interest rates steady at the upcoming September meeting. But he laid out a compelling case for why cooling inflation could keep him on hold.

In prepared remarks for an event in Washington, D.C. on Thursday, Waller said that while inflation is still “meaningfully” above the Fed’s 2% target, he’s seeing signs of cooling in recent data. That could push him to vote to keep rates steady at the Federal Open Market Committee meeting that takes place Sept. 15-16.

“If this [disinflation] continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,” Waller said, adding that his decision hinges on what the August inflation data show.

Waller’s tone Thursday was more dovish than the speech Chairman Kevin Warsh gave at Jackson Hole last week. The chairman’s remarks pushed markets to revise expectations for the September meeting in favor of a rate hike.

Waller noted that “nonmarket services prices” in the personal consumption expenditures price index—which include categories like financial services—accounted for approximately half of the increase in core prices. He went on to say that nonmarket services prices have always been an issue for him, since they are imputed and not actual price changes. When limiting these categories, Waller says underlying inflation is doing better than the core reading of 3.3% year over year in July might otherwise suggest.

Additionally, elevated energy prices and tariffs are no longer a significant source of ongoing inflation pressure, Waller said. And the trajectory of inflation is “encouraging.” The three-month core inflation was 3.05% in July, which has fallen steadily from 4.76% in February, Waller said, noting that’s a “considerable” improvement.

Waller did, however, acknowledge that ongoing global conflicts, trade policy, and artificial intelligence have all boosted inflation this year and could do so again. “If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16,” he said.

Currently, Waller said that it appears rate policy is only slightly restricting aggregate demand, so it would only take a small acceleration in inflation to nudge him into supporting tighter policy. “If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes.”

Waller’s data dependent approach was similar to what investors have heard this week from Fed Gov. Michael Barr and New York Fed President John Williams, who both said they would be closely monitoring the trends and trajectory of incoming inflation data.

There’s no “clear science” right now around whether monetary policy currently is sufficiently restrictive enough to bring inflation back to the 2% target or whether policymakers need to take further action to accomplish that, Williams said Wednesday. The latest data have been “encouraging” that progress on disinflation is occurring, but Williams said he’s waiting for more information to make his call.

Barr said he’s watching the data for evidence of broader price pressures taking hold, but if the trends point to moderation, then he’s open to officials taking their time to further assess the effectiveness of keeping the current target range for the federal funds rate at 3.50% to 3.75%. But if inflation appears not to be moderating sufficiently, then Barr said the Fed should “act decisively” to raise rates.

Looking beyond inflation, Waller said he believes that the U.S. economy remains on solid footing.

Though there’s only limited data available on third-quarter growth so far, including a weak retail sales report, Waller believes that consumption growth will remain healthy thanks to the rise in wealth from the stock market returns. He also expects business investment to remain robust, led by the buildout in AI.

Waller also pushed back against some economists and analysts that have argued AI investments should be discounted when looking at economic growth because they don’t produce a lot of sustained labor growth.

“AI investment is a legitimate part of GDP today, and I expect this technology will continue to be an important part of the economy after the buildout peaks and AI becomes as integrated into our lives as the internet has been,” Waller said.

The labor market is also still in “satisfactory shape,” Waller said, pointing out that while job creation has been volatile, payrolls have increased this year by an average of 60,000 a month through July.

He’s expecting Friday’s jobs data from the Bureau of Labor Statistics will not deviate much from recent trends.

Write to Megan Leonhardt at megan.leonhardt@barrons.com

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