Federal Reserve Governor Christopher Waller said on Thursday he remains open to holding interest rates steady at the September 15-16 Federal Open Market Committee meeting, provided recent disinflationary trends persist.
Waller, speaking in an interview, noted that while the pace of price increases has slowed since February, the 12-month core Personal Consumption Expenditures inflation rate remains at 3.3%, well above the Fed’s 2% target. He emphasized that incoming data, particularly the August Consumer Price Index due September 11, will heavily influence his decision.
"I judge that policy is currently only slightly restricting aggregate demand," Waller said. "It may not take much acceleration in inflation to nudge me into supporting tighter policy." He added that if inflation surprises to the upside, a rate hike in September remains on the table.
Market expectations for a September rate hike have fluctuated in recent weeks. Following Waller’s remarks, the odds of a hike in Fed funds futures and swaps markets shifted to roughly a 50-50 proposition. Earlier, after Fed Chair Kevin Warsh’s speech at Jackson Hole on August 28, those odds had risen to between 60% and 66%.
Treasury yields declined after Waller’s comments, while S&P 500 futures edged higher. Analysts at HSBC revised their year-end forecasts for U.S. government debt, lifting the two-year Treasury yield target to 4.20% from 3.85% and the 10-year yield to 4.65% from 4.30%. Goldman Sachs maintained its expectation for August core inflation to print at around 0.2%, keeping its S&P 500 year-end target at 8,000.
Waller also addressed recent adjustments to the Commerce Department’s methodology for estimating financial-services fees, calling it a "welcome measurement correction" that could reduce 12-month PCE inflation by a few tenths of a percentage point. He noted that nonmarket services prices accounted for about half of July’s core PCE increase.
The next major data points include August nonfarm payrolls, due September 4, and the August CPI release on September 11.
