The Fed’s Waller sees a “vital” price hike this month and helps a data-driven strategy

Christopher Waller, US President Donald Trump’s nominee for governor of the Federal Reserve, speaks during a Senate Banking Committee hearing Thursday, February 13, 2020 in Washington, DC, USA.

Andreas Harrer | Bloomberg | Getty Images

Federal Reserve Governor Christopher Waller on Friday echoed the latest views from his peers, saying he expected a big rate hike later this month.

He also said policymakers should stop guessing the future and instead go with what the data says.

“With a view to our next meeting, I support another significant increase in the key interest rate,” said Waller in a speech in Vienna. “But looking further into the future, I can’t tell you about the proper path of politics. The peak range and how fast we will move there depends on the data we will get on the economy.”

These comments echo recent statements by Fed Chair Jerome Powell, Vice Chair Lael Brainard and others who said they were determined to bring inflation down.

Markets strongly expect the central bank to hike interest rates by 0.75 percentage point, which would be the third straight move of this magnitude and the fastest pace of monetary tightening since the Fed began using interest rates as its primary policy tool the early 1990s.

While Waller didn’t commit to any specific raise, his comments had a mostly hawkish tone, indicating he would support the 0.75-point move as opposed to a half-point raise.

“Based on all the data we’ve received since the last FOMC meeting, I believe the policy decision at our next meeting will be easy,” he said. “Due to the strong labor market, there is currently no compromise between the Fed’s jobs and inflation targets, so we will continue to fight inflation aggressively.

If the Fed does the three-quarter-point hike, it would raise interest rates to a range of 3% to 3.25%. Waller said if inflation doesn’t abate by the end of the year, the Fed may have to rate rates “well above 4%.”

He further suggested that the Fed would refrain from its practice of “foresight” as to its future path and the factors that would come into play to dictate those moves.

“I think forward guidance is less useful at this stage of the tightening cycle,” he said. “Future decisions on the amount of additional rate hikes and the target for the policy rate this cycle should be dictated solely by the incoming data and its impact on economic activity, employment and inflation.”

Waller pointed to welcome signs that inflation is slowing from its highest peak in more than 40 years.

The personal consumption price index, the Fed’s preferred indicator of inflation, rose 6.3% yoy in July — 4.6% excluding food and energy. That’s still well above the central bank’s long-term target of 2%, and Waller said inflation is “widespread” despite the recent slowdown.

He also noted that inflation seemed to be slowing at one point last year, but then turned sharply higher until the CPI was up 9% year-on-year.

“The consequences of a bluff through a temporary slowdown in inflation could now be even greater if another miscalculation undermines the Fed’s credibility. So until I see meaningful and sustained moderation in core price increases, I will be committed to taking significant further steps towards monetary tightening,” he said.

Kansas City Fed President Esther George also spoke on Friday, raising concerns about inflation but also advocating a more deliberate approach to tightening monetary policy.

“As unsatisfactory as it may be, weighing the prime rate is probably just speculation at this point,” she said.

“We will need to guide the course of our policies through observation rather than reference to pre-pandemic theoretical models or trends,” George added. “Given the likely delays in transmitting tighter monetary policy to real economic conditions, this speaks to persistence and determination rather than speed.”

George was the only member of the Federal Open Market Committee to vote against the three-quarter-point rate hike in June, opting instead for a half-point hike, although she voted in favor of the July hike.

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