Fed Governor Waller expects further rate hikes if economic data meet expectations

Federal Reserve Governor Waller expects additional interest rate hikes if economic data continue to meet expectations, to return inflation to the 2% goal sooner. Waller said the hikes need not occur at consecutive meetings, but should be implemented within an acceptable period. Waller said the Federal Open Market Committee (FOMC) raised its policy rate by 25 basis points to between 3.75% and 4% in September after nine months without changes. Waller said several months of evidence, rather than the single August consumer price index inflation reading, supported Waller's decision to tighten policy.

Waller said the FOMC reduced rates by 75 basis points over three successive meetings from September through December 2025. Waller considered those cuts insurance against an economic slowdown amid rising unemployment and very low job creation. Waller said inflation was fairly close to the 2% target after accounting for tariff effects that research found were passing through inflation measures. Waller said other data supported an employment-focused assessment of risks after the government shutdown beginning October 1 interrupted official data.

Waller said the labor market appeared to stabilize in the first half of this year, while the Middle East conflict drove energy prices very high and partly stalled inflation progress. Waller supported unchanged rates in the spring and summer, hoping the conflict would end soon and the oil price surge would not have lasting inflation effects. Waller said monthly core personal consumption expenditures (PCE) inflation, which excludes food and energy prices, moderated to 0.1% in June. Waller said July core PCE inflation was initially estimated at 0.2% and later revised to 0.1%. Waller said experts warned that low oil inventories and damaged infrastructure could keep oil prices high through 2027 as hopes for a quick conflict resolution faded.

Waller said mounting evidence showed the artificial intelligence buildout significantly increased high-tech consumer prices, while projections for the buildout's size expanded. Waller said continuing trade conflicts threatened new tariffs that could again increase inflation. Waller said the first August inflation reading, released just before the September meeting, confirmed that inflation remained too high and insufficiently improved. Waller judged that the policy setting maintained from December 2025 through September of this year would not return inflation to 2% in a timely manner. Waller said strengthening economic activity in the second half of this year reduced Waller's concern that tighter policy would cause a damaging slowdown. However, Waller feared accelerating inflation, after nearly five and a half years above target, would increase consumers', investors' and price-setting businesses' inflation expectations.

Waller said data released last week left the economy roughly where the economy stood at the September FOMC meeting. Waller said September employment data showed a solid, stable labor market despite a lower overall number of jobs created. Waller said unemployment remained relatively low and near policymakers' median longer-run projection, while payroll gains were within estimated levels needed to keep unemployment steady. Waller said August data, incorporating revisions to the government's methodology, showed monthly core PCE inflation of 0.25%. Waller said the 12-month core PCE inflation rate was 3%. Waller said 12-month core inflation had remained between roughly 2.5% and 3.0% since spring 2024, without sufficient progress toward the target. Waller said monetary policy would focus on inflation for at least the near term.

Waller illustrated communication options with a hypothetical policy path involving three 25-basis-point hikes, totaling 75 basis points. Waller argued that silence about the expected path could create volatility, with markets potentially pricing zero or five hikes and producing insufficient or excessive economic restraint. Waller said strong forward guidance for 25-basis-point hikes at every other meeting would lead markets to price 75 basis points over five meetings. However, Waller argued that locking in such a path could produce poor outcomes by ignoring data suggesting faster, slower, larger or smaller tightening. Waller proposed signaling a likely 75-basis-point increase over an illustrative six months, while leaving the pace and size of hikes dependent on incoming data. Waller said this approach signals a likely direction without fixing a final destination beyond price stability and maximum employment.

Waller said Federal Reserve public communications and the quarterly Summary of Economic Projections serve this signaling role. Waller said September projections showed that 16 of the 18 FOMC participants submitting rate projections anticipated at least one additional hike during this year's two remaining meetings. Waller said four of those 16 participants expected two additional hikes. Waller said eight participants expected rates at the end of 2027 to be 50 basis points higher than current rates. Waller cautioned that the 2027 projections could reflect hikes early in the year followed by cuts later.

Waller said markets interpreted policymakers' projections and speeches as indicating a likely 50-basis-point increase in the coming months. Waller said federal funds futures prices as of yesterday indicated an 85% chance of at least one hike by the December meeting's conclusion. Waller said those prices indicated a nearly 20% chance of two hikes by that time. Waller said markets assigned nearly an 80% chance to at least two hikes by the March 2027 meeting. Waller said markets assigned a 33% chance to three or more hikes by that meeting.