Federal Reserve Governor Christopher Waller said Thursday he is leaning toward keeping interest rates steady at the central bank’s September meeting.
Waller’s position is contingent on no major surprises emerging from upcoming inflation data due over the next two weeks.
His remarks appear to contrast with those made last week by Fed Chairman Kevin Warsh, who struck a more hawkish tone at the annual Jackson Hole symposium in Wyoming.
Waller expressed confidence in current inflation trends, saying tariff impacts have likely been muted and higher energy prices have not substantially affected other parts of the economy.
While conceding that inflation is “meaningfully above” the Fed’s 2% target, he noted that recent trends “suggest we are finally seeing some signs of disinflation.”
“If this 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 in remarks for a Reuters interview.
Market-implied odds for a rate hike at the September 15-16 meeting dropped sharply following his comments, with traders pricing in just a 48.4% probability, down roughly 15 percentage points from Wednesday, according to CME Group’s FedWatch gauge.
“I’m going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting,” Waller said. “What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%.”
Waller did add caveats, noting that evidence of any reversal in inflation progress could shift his position before the meeting takes place.
“I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy,” Waller said.
“If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes,” he added.
The only major inflation reports the Fed will receive before the meeting are the consumer and producer price indexes, which the Bureau of Labor Statistics will release next week.
Those two reports feed heavily into the Commerce Department’s personal consumption expenditures price index, which the Fed uses as its primary inflation barometer.
Warsh, speaking at Jackson Hole, had said that recent softer monthly inflation readings “do not tell me that underlying trends have meaningfully improved,” adding that if trends do not cooperate, “we have work to do.”
Markets interpreted Warsh’s remarks as hawkish and quickly priced in a strong probability of a rate hike at the September meeting, a sentiment Waller’s comments have since tempered considerably.
Though headline inflation stood at 3.7% and core at 3.3% for July, Waller argued the underlying trends are actually “better than the core numbers suggest” and that the annual figures “are not the best guide for where inflation is today.”
He pointed out that the three-month inflation rate as measured by the Fed’s preferred gauge has slipped from 4.76% in February to 3.05% currently, calling it “a considerable improvement” whose “speed of this downward trajectory is encouraging.”
Waller also suggested that certain estimated “nonmarket services prices” could be artificially pushing inflation readings higher, and that upcoming revisions by the Bureau of Economic Analysis may lower figures published earlier this year.