Fed governor says 'some signs of disinflation have finally appeared'

Rate-hike odds fall from 60% to around 50% after remarks

Federal Reserve Governor Christopher Waller said he could support holding interest rates at the next policy meeting if strong employment conditions continue this month. [AP]
Federal Reserve Governor Christopher Waller said he could support holding interest rates at the next policy meeting if strong employment conditions continue this month. [AP]

Federal Reserve Governor Christopher Waller said Thursday he would support holding the benchmark interest rate steady this month if August inflation data continues to show a cooling trend — but left open the possibility of a hike if price pressures resurge. He also made clear that heading into the September FOMC meeting, inflation carries more weight in his thinking than employment.

Speaking at a Reuters-hosted virtual event Thursday (local time), Waller acknowledged that "inflation is still well above the Fed's 2 percent target" but said "recent data are finally showing some signs of disinflation."

"If the data over the next two weeks show that this progress continues, I would lean toward supporting keeping the policy rate at its current level," he said.

Waller pointed to recent price trends. The July Personal Consumption Expenditures price index and the core PCE index — which strips out volatile food and energy prices — both rose 0.2 percent from the prior month.

On a year-over-year basis, the PCE index was up 3.7 percent and the core PCE index rose 3.3 percent — still well above the Fed's 2 percent target. Waller said the recent monthly trend matters more than the 12-month rate.

"It is important to acknowledge the real impact these 12-month numbers have had on businesses and consumers," he said, "but these figures are not the best indicators of where inflation currently stands."

The remarks stand in contrast to the more hawkish tone struck recently by Fed Chair Kevin Warsh.

At last week's annual Jackson Hole economic policy symposium, Warsh said the Fed needed confidence that inflation was moving toward its target "at a clear and sufficient pace," adding, "If not, we have work to do." Markets interpreted the comments as keeping the door open to further rate increases.

Waller, however, stopped short of committing to a hold. He said a September rate hike could be warranted if incoming inflation data comes in stronger than expected.

He also noted that considerable uncertainty remains over how military conflicts, trade policy and AI could affect prices and economic activity going forward.

"If the August data show that this improvement was temporary, it may be appropriate to raise rates at the September FOMC meeting," he said.

Waller particularly signaled that inflation, not employment, would be the decisive factor in his September rate decision.

On the August jobs report due Saturday, he said he did not expect it to "deviate significantly from the trends we have been seeing." By contrast, he said he would place greater weight on the August inflation data due next week.

With international oil prices jumping amid rising military tensions in the Middle East and fears of reinflation growing, the August price reading is shaping up as the pivotal variable for the September FOMC.

Markets read Waller's comments as dovish. The probability of a September rate hike priced into markets fell from around 60 percent to about 50 percent.

US government bond yields also fell. Around 10:03 a.m. Eastern time, the benchmark 10-year Treasury yield stood at 4.758 percent, down 2.6 basis points (one basis point equals 0.01 percentage point) from the previous session.

With Warsh keeping the door open to further tightening on inflation-alert grounds and Waller offering a conditional stance — hold if disinflation continues, hike if it reverses — market attention has shifted squarely to the August inflation figures due next week.


sjy@heraldcorp.com