Federal Reserve signals December rate hike as Waller warns on credibility risk
Markets are already pricing in further Federal Reserve tightening after the central bank held rates steady in October. Christopher Waller says he is leaning toward a December increase and indicates a larger move could be justified if inflation data comes in above forecasts.
Highlights
- Federal Reserve Governor Christopher Waller signals support for a quarter-point rate hike in December regardless of potentially softer October inflation data.
- Waller states that if inflation exceeds forecasts, a half-percentage-point increase should be considered to protect the Fed’s credibility, instead of just 25 basis points.
- Waller warns that not implementing expected hikes would cause markets to scale back rate expectations, leading to an immediate and undesired loosening of monetary policy.
December hike path and policy message
As reported by CNBC, Federal Reserve Governor Christopher Waller says the central bank needs to follow through on expectations for additional interest rate increases or risk undermining its credibility. Speaking in London on Tuesday, he says he would support a quarter-point hike in December even if October inflation data is softer than expected.Waller also says a half-percentage-point increase should be considered if inflation readings are worse than forecast. He says hiking only 25 basis points in that scenario would put the Fed's credibility at risk, adding that higher rates will be needed sooner rather than later.
He supports the Fed's decision to hold rates in October, provided policymakers deliver the further tightening that markets already expect. Waller says the precise timing of individual moves matters less than ensuring promised hikes are implemented within a reasonable period.
Market implications for monetary policy
Waller says prior Fed communications led investors to price in additional rate increases, and he argues that clear and credible guidance must be backed by action. If those hikes are not carried out, he warns, markets will scale back expectations and interest rates will immediately fall, loosening monetary policy in an undesirable way.His comments reinforce a higher-for-longer message for U.S. monetary policy and keep attention on incoming inflation data ahead of the December meeting. For financial markets, the remarks suggest the range of possible outcomes still includes both a standard quarter-point increase and a larger half-point move if price pressures fail to ease.
Earlier, we reported that Kevin Warsh’s push for reduced Fed communication faced internal resistance as markets weighed an October hike.
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