Federal Reserve Governor Christopher Waller said Thursday that he expects the central bank will need to implement multiple rate increases to cool inflation in a timely fashion.
In prepared remarks at the Istanbul Economic Forum, Waller said that the economic data didn't shift the narrative much from the Federal Open Market Committee's September meeting. In fact, he sees the U.S. economy in "roughly the same place."
Looking at the history of 12-month core inflation as measured by the latest reading of the personal consumption expenditures price index released last week, Waller noted it has between roughly 2.5% and 3% since the spring of 2024.
"This is obviously higher than we want, above our target, and not showing sufficient progress," Waller said.
Meanwhile, the latest employment report released on Oct. 2, though more tepid than expected, still indicated that the labor market continued to be solid and stable in September. In other words, the labor market is still holding up and inflation is still too high.
"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2% goal," Waller said. "But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time."
Waller added that with evidence that economic activity is strengthening, he isn't overly concerned that higher rates will lead to a damaging economic slowdown. "But I am concerned that the recent acceleration in inflation -- after what soon will be five and half years of it above the FOMC's target -- will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation," he said.
While it may seem that the Fed's decision to raise the fed funds rate by a quarter of a percentage point to 3.75% to 4% was based largely on the single data point of consumer price index inflation for August, Waller pushed back on this narrative. Instead, he characterized the decision to raise rates as the "culmination of factors that developed over the past year."
He noted that earlier this year, there were "some signs" of an easing of inflation -- especially in the core readings. But a wide range of forces undermined Waller's faith that price growth would cool all the way back to 2% without intervention.
The first factor was the fact that a quick ending to the Middle East conflict didn't materialize and there's a real risk that oil prices will remain high through next year.
Waller also said evidence is mounting that the buildout of artificial intelligence is not only significantly driving up consumer prices in electrical components, chips and even building materials needed for data centers -- but that projections for the size of that buildout have "ballooned," Waller said. .
Waller also remains concerned about tariffs, noting that the continuing trade conflicts could put upward pressure on inflation again.
"In most cases, these were forces that became clearer as the year passed, swamping the fleeting signs of progress toward 2% inflation," Waller said. "When the first inflation reading for August came in hot just before the FOMC's September meeting, it was impossible to deny that inflation was still too high and not making sufficient progress toward our target."
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