Fed's Waller Backs December Rate Hike, and a Half-Point Move if Inflation Stays Hot

Federal Reserve Governor Christopher Waller said on Tuesday that the central bank should raise interest rates at its December meeting even if the October inflation report shows prices cooling, and should consider a half-point increase if inflation comes in hot.

Waller spoke at the Bank of England Watchers Conference in London. The Fed published the text at 09:00 GMT, four and a half hours before the October consumer price index lands at 13:30 GMT.

A quarter point at least

"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.

The test for a bigger move is specific. If core consumer prices, which strip out food and energy, rise 0.3 percent 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."

"Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take," he said.

Economists polled by Reuters expect core prices to rise a moderate 0.2 percent in October. Core prices rose 0.3 percent in both August and September.

Why he backed the October pause

Waller said he supported the decision to hold rates steady on October 28 in part because policymakers had all but promised more tightening. The Federal Open Market Committee raised its target range by a quarter point to 3.75 percent to 4.00 percent on September 16.

If the promised hikes are not carried out, he said, markets will cut expectations and rates will fall at once, loosening policy in a way the Fed does not want. The precise timing matters less than delivering the increases within a reasonable period.

Rate futures on Monday's close priced in about an 85 percent chance of a hike at the December 8 and 9 meeting, to a new target range of 4.00 percent to 4.25 percent, and a better than even chance of another hike as soon as March.

Inflation is the focus

Waller called inflation too high and the focus of his attention. The Fed targets 2 percent annual inflation on the personal consumption expenditures index. That measure rose 3.7 percent in the year to September, and core PCE inflation rose 3.1 percent. More than 70 percent of the components of core PCE services inflation rose 3 percent or more in September, he said.

He said he would study the October report for signs that the breadth of price increases is holding, including whether high-tech goods prices tied to the AI buildout keep rising fast and whether higher energy prices pass into other goods and services. Fed staff analyses suggest producer prices could keep rising and energy shocks could push prices up for longer than they did before the pandemic, possibly well into 2027 if oil stays expensive, he said.

Growth and jobs

US GDP grew at a 3.4 percent annualized rate last quarter. Waller said he expects growth to back off a bit in the current quarter as consumer spending slows, while output keeps growing at a solid pace.

He called the labor market solid, with worker demand and supply in rough balance and unemployment at 4.1 percent, while adding that the market may not be as healthy or as dynamic as that rate suggests.

Waller's plain rate guidance sets him apart from Fed Chair Kevin Warsh, who has resisted giving any guidance on the path of rates, Reuters noted.