Federal Reserve Governor Christopher Waller said on Thursday he would consider raising interest rates at the central bank’s September meeting if inflation data comes in stronger than expected, though he described recent disinflation as "encouraging."
Waller’s comments, made in an interview with Reuters NEXT, follow remarks last week by Fed Chair Kevin Warsh at the Jackson Hole symposium that briefly lifted market expectations for a September hike. Traders had priced in roughly a 60-66% chance of a rate increase after Warsh’s speech, but those odds have since moderated to near a 50-50 split in Fed funds futures and swaps markets following Waller’s remarks.
The Federal Reserve’s current federal funds rate target stands at 3.50%-3.75%, well above its 2% inflation goal. The 12-month core Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation measure, was 3.3% in July. Goldman Sachs economists expect August core CPI and PCE to print around 0.2%, which would keep annual inflation trending lower but still elevated relative to the Fed’s target.
Waller noted that policy is currently only "slightly restricting" aggregate demand and warned that even a modest pickup in inflation could prompt him to support tighter policy. He also highlighted a pending adjustment to the Commerce Department’s methodology for measuring financial-services fees, calling it a "welcome measurement correction" that could reduce 12-month PCE inflation by "a few tenths of a percentage point."
The Fed’s next policy meeting is scheduled for September 15-16, with key data releases ahead of the decision including August nonfarm payrolls on September 4 and the August Consumer Price Index on September 11. HSBC recently raised its year-end forecasts for U.S. Treasury yields, lifting its 2-year forecast to 4.20% from 3.85% and the 10-year forecast to 4.65% from 4.30%. Goldman Sachs maintained its S&P 500 year-end target at 8,000.
