Federal Reserve Governor Christopher Waller said on Tuesday that he will support raising interest rates at the Federal Reserve's December meeting even if October inflation data shows prices cooling — and he opened the door to a larger half-point increase if inflation comes in hot.
Waller's remarks, delivered in London ahead of the release of October consumer price data later on Tuesday, amount to one of the clearest signals yet from a senior Fed official that another rate hike is coming next month, despite a divided central bank and a political backdrop reshaped by last week's midterm elections.
Federal Reserve Governor Christopher Waller. Photo: Federal Reserve / Wikimedia Commons (public domain).
Even if inflation cools, a hike is coming
"While I am hoping for an improvement over September, even if this occurs, I would still support a 25 basis point increase in the FOMC's policy rate at our December meeting," Waller said in remarks prepared for delivery, referring to the October reading of the US consumer price index, due at 8:30 a.m. EST (1330 GMT).
Economists polled by Reuters expect core consumer prices, which exclude volatile food and energy prices, to have risen a moderate 0.2% in October from September, with headline prices up 0.3%.
But Waller set a clear trigger for going further. If core consumer prices rise 0.3% or more from September, "a stronger policy move may be needed," he said. "In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting."
Credibility is on the line
Waller argued that anything less than a December hike risks damaging the Fed's inflation-fighting credibility, given inflation that is too high and appears to be broadening out across the economy.
The Fed targets 2% annual inflation as measured by the personal consumption expenditures index, but September's reading was 3.7%, and core PCE inflation, which policymakers use to gauge the underlying trend, rose 3.1% from a year earlier. More than 70% of the components of core PCE services inflation rose 3% or more in September, Waller said.
His blunt guidance stands in sharp contrast with Fed Chair Kevin Warsh's resistance to giving any steer on the future path of rates. Waller said he backed the central bank's decision last month to skip a rate hike in part because policymakers had all but promised to deliver further policy tightening.
"If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way," Waller said. "So, while the precise timing of the hikes doesn't matter, ensuring that the promised hikes are implemented in a reasonable period of time does."
Markets already expect a December hike
Financial markets have largely priced in the move. Futures that settle to the Fed's policy rate priced in about an 85% chance of a hike at the Fed's December 8-9 meeting to a new target range of 4.00%-4.25%, as of Monday's close, and a better-than-even chance of another rate hike as soon as in March.
The Fed's policy rate currently stands at 3.75% to 4.00%, after a quarter-point increase in September — the first hike since 2023. The central bank held rates steady at its late-October meeting by a 10-2 vote while warning that inflation remained high.
The case for tightening was strengthened last week by a stronger-than-expected October jobs report, which showed the US economy adding 165,000 jobs while the unemployment rate fell to 4.1%.
What Waller is watching next
Waller said he expects GDP growth, which ran at a 3.4% annualised rate last quarter, to back off a bit in the current quarter as consumer spending slows to levels more consistent with household income and wealth, "but output will continue to grow at a solid pace."
The labour market, he said, is "solid" even if it is not as healthy and dynamic as a 4.1% unemployment rate might suggest, with worker demand and supply in rough balance. Inflation, by contrast, is too high and "the focus of my attention," he said.
Later on Tuesday, he said, he will be looking at whether the breadth of elevated inflation continues, including whether high-tech goods prices related to the artificial intelligence buildout keep rising at the very high rate of recent months, and whether higher energy prices are passing through to goods and services.
Recent Fed staff analyses suggest producer prices could continue to rise and that energy shocks may now deliver a more persistent push upward to prices than they did before the pandemic. "Their analysis suggests that, especially if oil prices were to remain elevated, these pressures could be larger than previously thought and persist well into 2027," Waller said.
The October inflation report lands later today — and its core reading will decide whether Waller's half-point option stays on the table or fades away.
Sources: Reuters; Federal Reserve; CME FedWatch.