Fed's Waller calls for two more rate hikes likely by year-end

Federal Reserve Governor Christopher Waller said he expects the US central bank will need to raise interest rates twice more this year to bring inflation down to its target, though more good data on prices could obviate the need for the second hike.

“I see two more 25-basis-point hikes in the target range over the four remaining meetings this year as necessary to keep inflation moving toward our target,” Waller said Thursday in remarks prepared for a dinner event hosted by the Money Marketeers of New York University. “I see no reason why the first of those two hikes should not occur at our meeting later this month.”

Answering questions from the audience after the speech, Waller pointed out that the US Bureau of Labor Statistics will publish two more consumer price index reports between the Fed’s upcoming July 25-26 policy meeting and the next gathering in September. He suggested good news could lead the central bank to cease rate hikes after this month.

“There’s a lot of discussion out there about, not so much the next meeting, but the September meeting. What I’m trying to say is the September meeting is a ‘live’ meeting and it depends on the data,” Waller said. “If the data looks like we’re making progress — we’ll get two more CPI reports. If they look like the last two, the data would suggest maybe stopping.”

Fed officials are widely expected to resume rate increases at the July 25-26 meeting after they paused their 15-month tightening campaign in June. But fresh data Wednesday, showing inflation cooled to the lowest levels since 2021, have raised doubts that Fed officials will opt for more rate hikes beyond that.

Conventional Wisdom

Waller argued in his speech that, contrary to conventional wisdom, the Fed’s five percentage points of rate increases since the beginning of 2022 have already had their impact on the economy, which implies the central bank should keep tightening instead of waiting to see if past moves will eventually slow economic growth.

“If one believes the bulk of the effects from last year’s tightening have passed through the economy already, then we can’t expect much more slowing of demand and inflation from that tightening,” he said. “Pausing rate hikes now, because you are waiting for long and variable lags to arrive, may leave you standing on the platform waiting for a train that has already left the station.”

While investors see a rate hike later this month as nearly certain, there is greater skepticism on Wall Street about additional tightening thereafter. Waller, who has consistently been one of the Fed’s more hawkish officials in recent years, argued that “the robust strength of the labor market and the solid overall performance of the US economy gives us room to tighten policy further.”

Beyond the July meeting, “if inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” he said.