Waller says Fed can ‘watch and see’ as financial markets tighten

Federal Reserve Gov. Christopher Waller said the U.S. central bank can watch and see what happens before taking further action with interest rates as financial markets tighten.

“The real side of the economy seems to be doing well. The nominal side is going in the direction we want. So we’re in this position where we kind of watch and see what happens on rates,” Waller said Wednesday at the annual E2 Summit in Park City, Utah.

“Financial markets are tightening up and they are going to do some of the work for us,” he said in a conversation moderated by Paul Ryan, a former Republican lawmaker who served as House speaker.

The U.S. economy has shown surprising resilience in the face of the Fed’s aggressive rate-hiking campaign, which took the target range for its benchmark interest rate to 5.25% to 5.5% from nearly zero in less than two years.

Treasury yields have surged since the central bank’s September policy meeting, and other Fed officials speaking this week said the rout in bond markets may suspend the need to tighten further for now.

Fed Vice Chair Philip Jefferson on Monday told a conference that he would “remain cognizant of the tightening in financial conditions through higher bond yields” in assessing “the future path of policy.” Earlier that day, Dallas Fed President Lorie Logan indicated that if risk premiums in the bond market are on the rise, that “could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”

Investors currently see little chance of a rate hike at the Oct. 31-Nov. 1 meeting, and a less-than 20% possibility of an increase in December, according to futures.

Waller said the Fed is “finally” getting good inflation data. 

“If this continues, we’re pretty much back to our target,” he said. Wage growth is softening, which portends well for service-sector firms, he said.