Waller favors holding Fed rates steady in September

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Waller favors holding Fed rates

Highlights

Waller currently favors holding rates steady in September.
September hike odds fell to 54.6% after his remarks.
Three-month inflation has declined to 3.05%.
August inflation data could still change his position.

Waller said the next consumer and producer price reports would be critical to his decision ahead of the Sept. 15-16 meeting, CNBC reported. His remarks quickly moved expectations in financial markets: the probability of a September rate increase fell to 54.6%, about 12 percentage points lower, according to CME Group data.

Waller sees improvement beneath headline inflation

Inflation remains well above the Fed’s 2% objective. Headline inflation stood at 3.7% in July, while the core measure was 3.3%. Waller, nevertheless, argued that shorter-term trends provide a more encouraging picture of current price pressures.

The three-month inflation rate based on the Fed’s preferred measure has fallen from 4.76% in February to 3.05%. Waller also suggested that estimated components of services inflation may be making the broader figures appear stronger than underlying conditions warrant.

Tariffs and higher energy costs have so far produced less spillover into the wider economy than some policymakers feared. That gives the Fed room to observe another round of data before deciding whether additional monetary tightening is necessary.

Fed officials differ over inflation risks

Waller’s assessment contrasts with the more cautious message delivered by Fed Chair Kevin Warsh at Jackson Hole last week. Warsh questioned whether softer recent inflation readings were sufficient evidence of a durable improvement and left the door open to further tightening.

Waller has not ruled out supporting a rate increase. He views monetary policy as only slightly restrictive and indicated that renewed inflation pressure could justify a modest adjustment. The August consumer and producer price reports, therefore, carry unusual weight before the meeting.

September decision becomes a test of patience

The debate matters because the Fed is approaching a decision with inflation still above target but moving in a more favorable direction on some shorter-term measures. Raising rates too quickly could restrain demand unnecessarily, while waiting carries the risk that inflation begins accelerating again.

The shift in market pricing after Waller’s comments shows how finely balanced the September decision has become. With traders now assigning only a modestly greater-than-even probability to an increase, next week’s inflation releases could determine whether the Fed tightens again or gives disinflation another month to develop.

Earlier, we reported that Goldman Sachs sees a September Fed rate hike as very unlikely.

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