Waller Says Fed May Need to Raise Rates to Tame Core Inflation

Federal Reserve Governor Christopher Waller said policymakers may need to raise rates in the near term if underlying inflation continues to signal broad price pressures.

(Bloomberg) — Federal Reserve Governor Christopher Waller said policymakers may need to raise rates in the near term if underlying inflation continues to signal broad price pressures. “If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term,” Waller said Monday, referring to the central bank’s rate-setting committee, in remarks prepared for an event in New York. The Bureau of Labor Statistics is due to release fresh data on consumer prices on Tuesday.

Waller emphasized the economy was in good shape, with the labor market appearing stable and consumer demand resilient. Still, he said, monetary policy was at a “crossroads” because of inflationary pressures driven by tariffs, energy prices and the build-out of artificial intelligence infrastructure. “No matter how you cut it, or what measure you want to use, inflation is up this year,” Waller said.

“At this point, I am concerned about the elevated pace of core inflation.” He pointed to the version of the Fed’s preferred inflation gauge that strips out volatile food and energy components. The core personal consumption expenditures index hit 3.4% in the year through May.

It began rising in January, Waller said, before the US-Iran war began, and “has steadily moved up.” Policymakers voted unanimously to hold their benchmark interest rate steady last month, though minutes of that meeting showed a few officials saw a case for a rate hike. In updated economic forecasts, half of 18 policymakers projected at least a quarter-point hike at some point this year.

Fed chairman Kevin Warsh declined to submit a rate projection and has avoided any detailed commentary on the economy, though he is set to appear before lawmakers this week. Another round of strikes between the US and Iran has sent energy prices higher, though oil remained well below its March and April peaks. In the data due Tuesday, the Consumer Price Index is expected to slow to 3.8% in the year through June, from 4.2% in May, according to a Bloomberg survey of economists.

“I would be very pleased to see a lower reading on core inflation, but after its escalation over the first half of this year, I will need to see several months of lower readings to feel that inflation is moving in the right direction,” Waller said. He added that it’s still reasonable to expect that outcome, in which case he would support continuing to hold rates steady. Waller also highlighted the need to avoid repeating mistakes from the pandemic-driven inflation shock in 2021 and 2022, when the Federal Open Market Committee was criticized for taking too long to raise interest rates.

The governor added, however, that — unlike that time period — the labor market isn’t showing signs of tightness and inflation expectations remain well anchored. Still, a persistent increase in underlying inflation could signal that price pressures are spreading through the economy. “The FOMC has to be ready to tighten monetary policy to prevent a repeat of the 2021-to-2022 inflation episode,” he said.