Fed's Waller Signals Support for Holding Rates Steady in

Federal Reserve Governor Christopher Waller said Thursday he is leaning toward keeping interest rates steady at the central bank's September meeting, provided there are no surprises from upcoming inflation data.

In remarks that contrast with statements last week from Chairman Kevin Warsh, Waller expressed confidence in current inflation trends, saying tariff impacts likely have been muted and higher energy prices haven't substantially affected other parts of the economy. While he conceded inflation is "meaningfully above" the Fed's 2% target, he said recent trends "suggest we are finally seeing some signs of disinflation."

"If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting," Waller said in remarks for a Reuters interview.

Market-implied odds for a rate hike at the Sept. 15-16 meeting dropped sharply following the comments, with traders now pricing in just a 48.4% probability, down about 15 percentage points from Wednesday, according to CME Group's FedWatch gauge.

"I'm going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting," Waller said. "What's the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%."

Waller added caveats, noting he could change course depending on incoming data. "I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy," he said. "If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes."

The Bureau of Labor Statistics will release the consumer and producer price indexes next week, the only major inflation reports before the meeting. Those figures feed heavily into the Commerce Department's personal consumption expenditures price index, the Fed's main inflation barometer.

Waller's remarks come less than a week after Warsh said, during a speech at the Fed's annual symposium in Jackson Hole, Wyoming, that recent softer monthly inflation readings "do not tell me that underlying trends have meaningfully improved," adding that "we have work to do" if trends don't cooperate. Markets took those comments as hawkish and priced in a stronger possibility of a hike at the upcoming meeting.

Waller offered a different take. Though headline inflation was 3.7% and core inflation 3.3% for July, he said underlying trends are "better than the core numbers suggest" and that annual numbers "are not the best guide for where inflation is today." He noted the three-month inflation rate, as measured by the Fed's preferred gauge, has slipped from 4.76% in February to 3.05% currently.

"That is a considerable improvement, and the speed of this downward trajectory is encouraging," Waller said.
He said certain "nonmarket services prices" that are estimated rather than observed could be pushing inflation numbers higher.
Revisions to how the Bureau of Economic Analysis computes the personal consumption expenditures price index are expected to lower earlier readings from this year.

Source: CNBC

Fed's Waller Signals Support for Holding Rates Steady in September

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