Fed's Waller leans toward holding rates steady in September

Federal Reserve Governor Christopher Waller said on Thursday he is leaning toward supporting unchanged interest rates at the central bank's September meeting. His stance hinges on upcoming inflation data confirming recent disinflation trends.

Waller expressed confidence that tariff impacts have likely been muted and that higher energy prices have not substantially affected the broader economy. While conceding inflation remains meaningfully above the Fed's 2% target, he argued recent data suggests signs of disinflation are finally appearing.

Market reaction to dovish signal

Market expectations for a rate hike shifted dramatically following Waller's remarks. According to the CME Group's FedWatch gauge, the market-implied probability of a rate increase at the September 15-16 meeting fell to 48.4%. This represented a drop of about 15 percentage points from the previous day.

"If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting," Waller said in a Reuters interview. He paraphrased John Lennon, stating, "Give disinflation a chance. We can wait one meeting."

Contrast with Chairman Warsh

Waller's comments provide a different perspective from those of Fed Chairman Kevin Warsh just days earlier. During a speech at the Fed's Jackson Hole symposium, Warsh cautioned that recent softer monthly inflation readings did not indicate a meaningful improvement in underlying trends. He added that if trends did not cooperate, "we have work to do."

Markets interpreted Warsh's remarks as hawkish, quickly pricing in a strong possibility of a September rate hike. Waller, however, offered a more dovish take, emphasizing the speed of recent disinflation.

Waller's data-driven caveats

The policymaker added significant caveats to his position. Waller noted he could change his view if new data before the meeting indicates a reversal. "I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy," he stated.

He specified that evidence of reversed progress toward 2% inflation in August could prompt him to support a "small adjustment" in policy stance. The only major inflation reports left before the meeting are the consumer and producer price indexes due next week.

Analyzing the inflation trajectory

Waller argued that underlying inflation trends are better than the core numbers suggest. He pointed to a sharp decline in the three-month inflation rate measured by the Fed's preferred personal consumption expenditures price index.

"That is a considerable improvement, and the speed of this downward trajectory is encouraging," Waller said. He also suggested that estimated "nonmarket services prices" might be pushing reported inflation figures higher. Also, upcoming revisions to the way the personal consumption expenditures index is computed are expected to lower inflation readings issued earlier this year.