Federal Reserve Governor Christopher Waller said monetary policy could require tightening "in the near term" if forthcoming readings show inflation continuing well above the Fed's 2% target. In remarks prepared for the New York Association for Business Economics, Waller described policy as being at a crossroads and emphasized that the path forward depends on fresh data, beginning with a consumer inflation report expected this week.
Waller said the Fed should not be "lackadaisical" if incoming information moves in the wrong direction. He noted that a resumption of hostilities between the U.S. and Iran could lift oil prices again, eliminating one of the factors that had been on the verge of helping to lower costs. That geopolitical development, he said, could complicate the outlook for inflation and the policy response.
At the same time, Waller acknowledged there remains a "credible case" that inflation could fall back toward the 2% objective with policy left at current settings. He balanced that with an equally plausible scenario in which inflation holds at elevated levels or trends higher, a development that would require tighter monetary policy in the near term.
Waller expressed particular concern that recent inflation reports show price pressures appearing to broaden across the economy. He cautioned that this widening cannot be fully explained by last years import tariff increases or the recent jump in energy costs, and that it might instead reflect more systemic inflationary forces that would necessitate a stronger policy response from the Fed.
While stressing that the current situation is not on par with the breakout of price rises seen after the COVID-19 pandemic, Waller noted distinctions such as a labor market that is not as tight as during that earlier episode. He said the Fed benefits from anchored inflation expectations, an advantage the Federal Open Market Committee should not squander by delaying a response should inflation persist.
"I dont take the inflationary signals I have discussed today lightly," Waller said in his prepared remarks. He added, "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." He further observed that it would take "several months of lower readings to feel that inflation is moving in the right direction."
Waller also said he is mindful of the risk of raising rates too soon and unintentionally tipping the economy into recession. He described the labor market as stable and argued the Fed must avoid repeating the error of waiting too long to respond to rising price pressures, a mistake he said occurred several years ago.
The Federal Reserve left interest rates unchanged at its June 16-17 meeting. At that gathering, policymakers were evenly split over the likely need for an additional rate increase later in the year. Wallers comments underscore that decisionmakers will be watching incoming inflation data closely as they weigh whether to move away from the current policy stance.
Implications for markets and sectors
Wallers remarks underline potential near-term volatility in interest-rate sensitive markets should inflation surprise to the upside. Sectors that typically feel such shifts include real estate and fixed income, as well as energy markets if oil prices rise due to geopolitical tensions. A move toward tighter policy would affect borrowing costs, cap rates, and balance-sheet planning for leveraged firms, while a stable or improving inflation trajectory could reduce the urgency for additional rate increases.
Next steps and signals to watch
- The consumer inflation report due this week, which Waller highlighted as a key determinant of the Feds near-term direction.
- Subsequent monthly inflation readings over the coming months, since Waller said it would take several months of lower readings to confirm a sustained move toward the 2% goal.
- Geopolitical developments that could push oil prices higher and alter the inflation trajectory.