Federal Reserve Governor Christopher Waller stated on Monday that while current U.S. inflation remains a concern, policymakers should not rush to hike interest rates again simply due to lessons learned from the delayed response in 2021. Instead, the Fed should await more economic data to assess the inflation trajectory and its underlying drivers.
Speaking in New York, Waller noted that current inflationary pressures stem not only from tariffs and rising energy costs but also from factors such as demand expansion fueled by investments in artificial intelligence (AI), which is a significant reason why inflation continues to exceed the Fed's 2% target.
However, he emphasized the need for the Fed to avoid repeating past mistakes. "I am acutely aware of the mistake we made by not responding sooner to high inflation in 2021, and I am determined not to make that mistake again," Waller said. "But that does not mean we should immediately raise rates in the face of the current inflationary pressures."
Waller believes there are still "good reasons" to expect inflation to gradually decline in the future. Yet, he also acknowledged a "perfectly reasonable" scenario where inflation remains elevated or rises further, potentially necessitating additional monetary policy tightening in the near term.
He pointed out that the Fed is currently evaluating multiple factors driving inflation, including tariff policies set for 2025, energy price increases due to Middle East tensions, and demand spillover effects from AI investment. "We cannot tighten policy prematurely simply because we acted too slowly last time, nor can we repeat the 2021-2022 mistake of acting too late again in response to inflation," he said.
Nevertheless, Waller noted that compared to the previous inflation cycle, the Fed currently has two favorable conditions: first, the labor market remains robust and is not a primary source of inflationary pressure; second, long-term inflation expectations have generally remained stable, with market indicators at least showing continued public confidence in long-term inflation.
Despite this, he warned that policymakers cannot afford to be complacent. "I often hear the view that as long as inflation expectations remain anchored, the central bank does not need to react to inflation above the target. That view is incorrect," Waller stated. "Simply watching inflation and hoping it will come down on its own is not a viable policy option."
Waller's remarks came ahead of the Tuesday release of the June Consumer Price Index (CPI) report by the Bureau of Labor Statistics (BLS). Economists surveyed by Dow Jones expect, influenced by a significant drop in international oil prices, the headline CPI to decline 0.2% month-over-month, with core CPI (excluding food and energy) expected to rise 0.2%. Year-over-year, the headline CPI growth rate is projected to decrease from 4.2% in May to 3.8%, while core CPI growth is anticipated to ease from 2.9% to 2.8%.
Waller said that if core inflation data indeed shows a decline, he would welcome it. However, given the persistent high inflation in the first half of this year, he would need to see several consecutive months of improvement to be confident that inflation is back on the right track. "If future data aligns with this assessment, I believe maintaining the current target range for the federal funds rate will remain an appropriate policy choice," he added.
According to the CME FedWatch Tool, the market currently prices in approximately a 39% probability of a Federal Reserve rate hike at the policy meeting scheduled for the end of July.
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