Fed Governor Christopher J. Waller on Monday warned the central bank may be forced to hike interest rates soon if new inflation data this week comes in hotter than expected.
As the war in Iran has pushed inflation to a three-year high while the labor market remains resilient, all eyes at the Federal Reserve are on prices – flipping from an easing bias to a tightening one.
“If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term,” Waller, who was nominated by President Trump in 2020, said Monday at an event hosted by the New York Association for Business Economics.
June’s Consumer Price Index is expected to show some relief Tuesday morning, with a 0.1% decline over the month and the yearly figure slipping to 3.8%, down from 4.2% the previous month.
The Producer Price Index on Wednesday is expected to show a yearly reading of 6.2%, also down from 6.5% the previous month – but Waller said just one month of improved readings isn’t enough to shake off inflation concerns.
“I would be very pleased to see a lower reading on core inflation, but after its escalation over the first half of this year, I will need to see several months of lower readings to feel that inflation is moving in the right direction,” Waller said.
“For the reasons I have laid out today, I think that is still a reasonable outcome, and I would then continue to hold the policy rate at its current target range.”
The majority of traders – or nearly 60% – still expect the Fed to hold interest rates in the key 3.5% to 3.75% range at their July 29 meeting, according to CME FedWatch, which tracks 30-day Fed Funds futures.
But now roughly 40% of traders are predicting a quarter-point rate hike at the meeting, a sharp shift from earlier this year, when investors were hopeful the Fed would continue slashing rates after issuing three consecutive cuts in 2025.
The on-and-off blockade of the Strait of Hormuz, a vital maritime route for 20% of the world’s oil, has sent demand and energy prices higher, unsurprisingly fueling inflation – but core measures of inflation have also remained stubbornly high.
That indicates higher energy prices have already started to seep into the broader economy, raising price tags on food, fuel and other goods transported by heavy trucks, which run on pricey diesel.
While Waller said there is a “credible case” for inflation to start easing down toward the Fed’s 2% goal, which it has eclipsed for five years, he warned that there is an “equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.”
“When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation,” Waller said. “Sternly staring at inflation until it melts before our withering gaze is not an option.”
Investors are keyed into any signals from Fed officials about the direction of policy, as they debate the risks of holding interest rates flat, which could leave the economy vulnerable to a long-term inflation problem, or raising rates too early, which could stunt economic growth.
New York Fed President John Williams and Fed Governor Lisa Cook, who remains in her position after the Supreme Court ruled against the Trump administration’s efforts to fire her, will be making speeches Wednesday.
Fed Vice Chair Philip Jefferson, Dallas Fed President Lorie Logan and Kansas City Fed President Jeff Schmid will be speaking Thursday.
Kevin Warsh is scheduled to make his first appearances before Congress as Fed chairman Tuesday – but the new central bank leader has repeatedly argued against the need for forward guidance from policymakers, even refusing to participate in “dot-plot” projections last month.
Warsh, who was nominated by Trump in January, has argued that financial markets perform best when they react to actual data, not the Fed’s interpretation of the numbers.
But he did come off surprisingly hawkish during his first Fed meeting as chairman last month, when he took a strong anti-inflation stance – despite Trump repeatedly saying he would only nominate someone for the job who was ready to slash rates.