Fed’s Waller says ‘too soon to tell’ if more interest rate hikes needed

Federal Reserve Governor Christopher Waller said the U.S. central bank can wait and gather more data before deciding if the economy needs further monetary restraint, signaling that he favors holding interest rates steady when officials meet in two weeks.

“I believe we can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate,” Waller said in remarks prepared for the European Economics and Financial Center in London. “I will be looking carefully at the data to see whether the real side of the economy begins to cool off or whether prices, the nominal side of the economy, heat up.”

“As of today, it is too soon to tell,” he added.

U.S. central bankers have raised the benchmark lending rate to a range of 5.25% to 5.5% from near zero over 19 months, the fastest pace since the late 1970s. The speed of tightening has rattled the financial system with a series of bank failures in March, while 10-year Treasury note yields have jumped about a percentage point since July. Still, the economy remains resilient with robust consumption fueled by strong job growth.

Payrolls have risen by an average of 260,000 a month this year. Retail sales exceeded forecasts last month, and industrial production strengthened. Inflation has slowed, but measured by the Fed’s preferred index, minus food and energy, the 12-month pace was almost 4% in August.

Fed officials, from Waller to Chair Jerome Powell, have been emphatic that price growth must return to the 2% target. 

Also speaking on Wednesday, New York Fed President John Williams said rates will have to stay at restrictive levels for some time to get inflation to policymakers’ goal. 

“We’re going to stick at it to make sure that we really achieve that goal of 2% on a sustained basis,” Williams said in a moderated conversation at Queens College in New York. 

Fed Governor Michelle Bowman, also speaking Wednesday, said the central bank is “highly focused” on reaching the inflation target. 

“Inflation has come down, but we know that it is still too high,” she said in remarks at a Fed Listens event. The central bank’s ability to deliver on its target “depends importantly on being able to separate the short-term effects of temporary events from longer-term structural shifts in the economy.”

Waller said he is watching two scenarios. The trend of the past few months where the labor market has been strong while inflation has decelerated with moderating wage growth has been positive, he said. If this continues, “I believe we can hold the policy rate steady and let the economy evolve in the desired manner,” he said.

“But I also can’t avoid thinking about the second scenario, where demand and economic activity continue at their recent pace, possibly putting persistent upward pressure on inflation and stalling or even reversing progress toward 2%,” he said, adding that the Fed would put its gains on inflation and longer-run price stability at risk if it did nothing. 

“More action would be needed on the policy rate to ensure that inflation moves back to target and expectations remain anchored.”

Fed officials are navigating an unusual period of cross-currents. Minutes show they are trying to balance two-sided risks of not putting enough restraint in place to get inflation down against over-shooting and throwing the economy into a recession.  Waller said the increase in longer-term borrowing costs should “weigh on both household and business spending.”

In a question-and-answer period, Waller said it was too soon to discuss rate-cut scenarios other than what might proceed from standard policy rules. He also said he doubted the Middle East conflict would mean much for US growth unless it grows into a much wider “conflagration.” 

Waller said he expected the Fed’s balance sheet to run down $2 trillion to $2.5 trillion in total, with runoff already down about $1 trillion from the $8.96 trillion peak in 2022.