WASHINGTON — Federal Reserve Governor Christopher Waller said Thursday that an inflation report to be released next week will largely determine whether he supports an interest rate hike later this month. The government will release August inflation figures on Sept. 11, four days before the Federal Reserve's next policy meeting is scheduled for Sept. 15-16.

Waller said he is leaning toward keeping interest rates steady at the September meeting provided there are no surprises from upcoming inflation data. He said his decision on the appropriate stance of policy would be heavily influenced by the August inflation data. He indicated a willingness to wait for further evidence of cooling prices before adjusting the current monetary stance.

Waller said that if there is continued progress toward the Fed's 2% inflation goal, he would be willing to support holding the policy rate at its current level. He noted that recent trends suggest the economy is moving in the right direction. He said that if this continues in the data due over the next two weeks, he would be inclined to support holding the target for the federal funds rate at its current setting.

However, Waller maintained that his position remains conditional on the incoming data. He said that if inflation comes in hot, he would consider a rate hike. He warned that the threshold for action might be low if price pressures accelerate. He said it may not take much acceleration in inflation to nudge him into supporting a rate hike.

Waller conceded that inflation is meaningfully above the Fed's 2% target. Despite this gap, he pointed to improving metrics. He said inflation "is making slow but continued progress on reaching" the 2% goal.

He cited specific declines in short-term measures as evidence of this trend. He noted that recent trends suggest the economy is finally seeing some signs of disinflation.

The governor provided context on current price levels. He said headline inflation was at 3.7% and core at 3.3% for July. He also noted movement in the Federal Reserve's preferred gauge.

Waller said the three-month inflation rate as measured by the Fed's preferred gauge has slipped from 4.76% in February to 3.05% currently. This decline represents a shift in the inflation trajectory over recent months.

Waller addressed external factors that have contributed to price pressures. He stated that tariff impacts likely have been muted and higher energy prices have not had a substantial impact in other parts of the economy. He said he does not see elevated energy prices and tariffs as a significant source of ongoing inflation pressure.

He added that the impact of import tax increases has likely passed through the economy. Additionally, he said higher energy prices tied to the war in the Middle East do not appear to be bleeding into other prices.

The governor also discussed the current state of economic demand. He said borrowing costs are only slightly restricting consumer and business demand. He said his main policy focus at this time is on inflation, given the solid performance of the overall economy and the relative stability of the labor market. The current Fed policy rate is 3.50%-3.75%, according to Waller.

Waller identified technical factors that may affect inflation readings. He said certain nonmarket services prices that are estimated rather than observed could be pushing the inflation numbers higher. Revisions to the way the Bureau of Economic Analysis computes the personal consumption expenditures price index are expected to take inflation readings issued earlier this year lower. The Bureau of Economic Analysis is a United States federal agency responsible for these calculations.

Market participants adjusted their expectations following Waller's comments. Market-implied odds for a rate hike at the Sept. 15-16 meeting dropped sharply following Waller's remarks, with traders pricing in a 54.6% probability, down about 12 percentage points, according to the CME Group's FedWatch. Traders trimmed bets on a rate hike at this month's meeting to just above even odds, down from about 60% earlier, after the release of Waller's remarks.

Why It Matters

The upcoming August inflation report serves as a critical data point for Federal Reserve policymakers as they approach the Sept. 15-16 meeting. Governor Waller's statements indicate that the central bank is prioritizing data dependence over pre-commitment to a specific policy path. The market reaction, with implied odds of a rate hike falling to 54.6%, reflects investor interpretation of Waller's tilt toward holding rates steady if disinflation continues.

The distinction between headline and core inflation, along with the three-month trend in the personal consumption expenditures price index, provides a nuanced view of price pressures. With the current policy rate at 3.50%-3.75%, the decision to hike or hold will depend on whether the August data confirms the recent slowdown from the 4.76% level seen in February. The potential for methodological revisions by the Bureau of Economic Analysis adds another layer of complexity to interpreting recent inflation figures.

Timeline

On Sept. 5, 2024, Waller said inflation is making slow but continued progress on reaching the 2% goal. Also on Sept. 5, 2024, he said his decision on the appropriate stance of policy would be heavily influenced by what is learned about August inflation. On the same date, he said that if there is continued progress toward the 2% goal, he would be willing to support holding the policy rate at its current level.

Waller conceded on Sept. 5, 2024, that inflation is meaningfully above the Fed's 2% target. Also on Sept. 5, 2024, he said that if the data due over the next two weeks continues as expected, he would be inclined to support holding the target for the federal funds rate at its current setting. On Sept. 5, 2024, he said the cost of waiting one meeting is minimal, as hiking 25 basis points at this meeting would not bring CPI down to 2%. Finally, on Sept. 5, 2024, he paraphrased John Lennon by saying disinflation should be given a chance and that waiting one meeting is acceptable.

What's New

Additional reporting included Waller's statement that the cost of waiting one meeting is minimal, as hiking 25 basis points at this meeting would not bring CPI down to 2%. He also said disinflation should be given a chance and that waiting one meeting is acceptable. Further details emerged when Waller conceded that inflation is meaningfully above the Fed's 2% target. He also said inflation is making slow but continued progress on reaching the 2% goal. He stated that his decision on the appropriate stance of policy would be heavily influenced by what is learned about August inflation. He added that if there is continued progress toward the 2% goal, he would be willing to support holding the policy rate at its current level. Waller also said that if the data due over the next two weeks continues as expected, he would be inclined to support holding the target for the federal funds rate at its current setting. Additionally, he said he does not see elevated energy prices and tariffs as a significant source of ongoing inflation pressure.

How Sources Differ

Regarding Waller, the Bureau of Economic Analysis Personal Consumption Expenditures price index data shows he said the three-month inflation rate as measured by the Fed's preferred gauge has slipped from 4.76% in February to 3.05% currently. In contrast, CME Group FedWatch data indicates traders trimmed bets on a rate hike at this month's meeting to just above even odds, down from about 60% earlier, after the release of Waller's remarks.

Meanwhile, Reuters NEXT Newsmaker event remarks report Federal Reserve Governor Waller said Thursday that an inflation report to be released next week will largely determine whether he supports an interest rate hike later this month. Regarding a rate hike, CME Group FedWatch data shows traders trimmed bets on a rate hike at this month's meeting to just above even odds, down from about 60% earlier, after the release of Waller's remarks. Conversely, Reuters NEXT Newsmaker event remarks report Federal Reserve Governor Waller said Thursday that an inflation report to be released next week will largely determine whether he supports an interest rate hike later this month.