Fed's Waller signals openness to supporting September rate hold

Federal Reserve Governor Christopher J. Waller said Thursday he would likely support keeping the federal funds rate unchanged at the central bank's mid-September meeting, provided upcoming inflation data continues to show improvement – a notably more dovish tone than the one struck by Fed Chair Kevin Warsh just over a week earlier.

Speaking at a Reuters event in Washington, D.C., Waller said while inflation remains meaningfully above the Federal Open Market Committee's 2 percent goal, recent data suggest the economy is finally seeing some signs of disinflation.

Assuming that direction of travel is maintained over the next two weeks, he would be inclined to support holding the federal funds rate at its current setting. Still, he may change his mind based on incoming August inflation data.

"I'm going to paraphrase John Lennon here. Give disinflation a chance," Waller said at the Reuters event.

A data-dependent case for a pause

Waller's remarks lean heavily on the trajectory of core inflation rather than the year-over-year headline number. Personal consumption expenditures prices rose 0.2 percent in July, with core prices excluding food and energy also up 0.2 percent, he said. Three-month core inflation has also fallen steadily from 4.76 percent in February to 3.05 percent – what he called a considerable improvement.

He noted that real GDP grew at a 1.8 percent annual rate in the first half of the year and that the unemployment rate fell to 4.1 percent in July, a level he described as historically low.

Read more: Buried in today's jobs report: Wall Street's own backyard is shrinking

"If there is continued progress toward our 2 percent goal, then I am willing to support holding the policy rate at its current level," Waller said.

"But if inflation comes in hot, I would consider a rate hike," he added, warning that "it may not take much acceleration in inflation to nudge me into supporting tighter policy."

The next two data points – Friday's August employment report and next Thursday's Consumer Price Index – will shape that decision.

As recently as last month, July's in-line CPI print has anchored the odds of a September hold to a practical coin-flip, though market pricing has swung repeatedly on each new inflation release this summer. Waller's comments suggest he sees the August CPI print, due September 11, as decisive.

A different tone than Jackson Hole

Waller's framing stands in contrast to comments Warsh made less than two weeks ago. At his first Jackson Hole address as Fed chair, Warsh said softer summer inflation readings do not tell him underlying trends have "meaningfully improved," adding that "otherwise, we have work to do – that's our job, that's our mandate, and that's our charge to keep." 

Read more: No Fed relief at Jackson Hole: Warsh keeps rate-hike door open

The two policymakers' diverging emphasis – Warsh weighing the multi-year persistence of above-target inflation, Waller weighing the recent deceleration – reflects a broader split among FOMC members. That split was visible at the July meeting, when three officials dissented in favor of an immediate quarter-point hike, the first instance of three dissenting voices since 2016.

Waller also devoted some time to explaining his communication style, agreeing with Warsh that open-ended forward guidance "isn't appropriate now," even as he laid out, in some detail, the specific data outcomes that would move his own vote.

"I view myself as a home plate umpire in baseball," Waller said, likening his reaction function to economic data to the umpire's strike zone. "The players don't expect the umpire to have a perfect strike zone – they just need a rough idea of its parameters and some guarantee that it won't change much on every pitch. Perfection is not needed for them to play well."