In a strong signal that the Federal Reserve won't raise interest rates at its next meeting but could easily do so later, Fed Governor Christopher Waller on Wednesday said he wants to "wait, watch and see" if the U.S. economy continues its run of strength or weakens in the face of the Fed's rate hikes to date.
"Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work," Waller, one of the Fed's most hawkish policymakers, said in remarks prepared for delivery to the European Economics & Financial Center Seminar in London. "But if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run-up in longer-term rates."
The Fed drove its policy rate up aggressively last year to bring inflation down from 40-year highs, and this year there has been clear progress on reducing price pressures, even as the job market has remained strong, Waller said in his remarks.
"The data in the past few months has been overwhelmingly positive for both of the FOMC’s goals of maximum employment and stable prices," he said. But that can't continue, he said.
If the economy slows, "we can hold the policy rate steady and let the economy evolve in the desired manner," he said.
But if demand and economic activity continue at their recent pace, that could put upward pressure on inflation, and "more action would be needed on the policy rate to ensure that inflation moves back to target and expectations remain anchored."
Waller was among the earliest in 2021 to push for Fed policy tightening to bring down inflation, and among the most vocal supporters of "frontloading" the rate-hike campaign in big chunks last year to puncture price pressures more quickly.
The central bank did exactly that, lifting its short-term policy rate from near zero in March 2022 to a range of 5.25%-5.50% in July of this year, where it has held it since.
Now, Fed policymakers are weighing if that level is high enough to get inflation on a path to their 2% goal. Some have recently pointed to the nearly full percentage point rise in the yield on the 10-year Treasury note since the Fed's July rate hike, saying the elevated long-term market rates will likely blunt demand and economic activity, leaving less for the Fed to do.
Other Fed policymakers have pointed to a recent, though so-far short-lived, acceleration in inflation and job growth, signs the Fed's policy may not be restrictive enough.
Waller on Wednesday said it is "too soon to tell."
