Fed Governor Waller warns inflation could justify 50-basis-point rate hike

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Waller backs December rate hike

Highlights

Waller supports a December rate hike to contain persistent inflation.
He may back a 50-basis-point increase if core CPI remains elevated.
Markets had priced in an 85% chance of a December hike.

According to Bloomberg, Waller outlined his position during a speech in London on Tuesday, ahead of the release of October consumer inflation figures. He indicated that a 25-basis-point increase would be appropriate if monthly inflation eased, but persistent price pressures could justify a 50-basis-point move at the December 8-9 policy meeting.

Waller signals a tougher approach to inflation

Waller described the US economy as resilient, with employment conditions remaining stable despite restrictive borrowing costs. However, he argued that inflation has not slowed sufficiently to give policymakers confidence that price stability is returning. The October consumer price index report will therefore play an important role in determining how aggressively the central bank should respond.

A particular concern is core inflation, which excludes volatile food and energy prices. If monthly core CPI remains near 0.3% or rises further, Waller believes the Fed should consider increasing rates by half a percentage point. Such a decision would represent a stronger response than the conventional quarter-point adjustment and signal greater urgency in containing inflation.

Fed officials prepare for December decision

The Federal Reserve left its benchmark interest rate unchanged at its October meeting in a 10-2 vote, maintaining the target range at 3.75% to 4%. That decision followed a unanimous 25-basis-point increase in September. Policymakers opted to gather additional economic evidence before deciding whether another adjustment was necessary.

Recent labor market figures have strengthened the argument for further tightening. US employment growth accelerated in October while unemployment edged lower, suggesting the economy continues to withstand higher interest rates. Several Fed officials have since supported additional increases, and traders on Monday assigned roughly an 85% probability to a December hike.

Inflation data could shape the next Fed decision

The upcoming US inflation report could determine whether the Federal Reserve opts for a conventional interest rate increase or takes a more aggressive approach in December. Waller has made clear that persistent price pressures would strengthen the case for faster tightening, particularly if underlying inflation shows little sign of easing. A stronger move would also signal the central bank's determination to restore confidence in its ability to control inflation.

For financial markets, the consequences could extend well beyond borrowing costs. More aggressive Fed policy could strengthen the US dollar, weigh on gold prices, and put pressure on stocks as investors reassess the outlook for interest rates. The next inflation and employment reports will be crucial in shaping expectations ahead of the December meeting.

Earlier, we reported that Fed rate hike bets rise after U.S. jobs data.

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