Fed Governor Chris Waller Weighs in on Inflation Report's Impact on Rate Hike Decision

As the Federal Open Market Committee (FOMC) prepares for its upcoming meeting later this month, the decision on whether to raise interest rates remains uncertain. However, Fed Governor Christopher Waller has recently stated that his decision will likely come down to the August inflation report, which is set to be released on September 11.

Why the August Inflation Report Matters

For years, inflation has remained above the Fed's preferred 2% target, with the Iran war exacerbating the situation by raising oil and gas prices. However, in recent months, there have been some signs that inflation could be cooling. In July, core inflation rose 0.2%, with headline year-over-year inflation coming in at 2.5%. This was in line with consensus estimates, but the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, came in slightly hotter than expected.

The Fed is trying to thread the needle, balancing the risk of inflation reverting to higher levels or remaining persistently high with the risk of accidentally tipping the economy into a recession. At the FOMC's last meeting, the committee chose to leave rates unchanged within the 3.50%-3.75% range, but three members of the 12-member voting committee dissented, preferring a quarter-point hike.

Waller's Comments and Their Implications

Waller's statement that his decision will likely come down to the August inflation report has significantly upped the stakes for the report's release. If inflation comes in hot, Waller would consider a rate hike, but if there is continued progress toward the 2% goal, he would support holding the policy rate at its current level.

Waller's comments are significant because he is one of the more hawkish members of the FOMC. His willingness to consider a rate hike if inflation comes in hot suggests that he is taking a more aggressive stance on inflation, which could influence the decision of other FOMC members.

What to Watch Next

The market has had a tough time figuring out how FOMC Chair Kevin Warsh truly views inflation. In some regards, he's sounded hawkish, saying prices are still too high on numerous occasions. In other circumstances, he's been more vague, talking about other ways the Fed might measure inflation that could make inflation appear lower than it is under the Fed's current measurement tools.

However, it's worth noting that the FOMC chair's job is to build consensus among the committee. So, even if Warsh has secretly been hawkish, it may have been difficult for him to advocate for a rate hike when most members didn't prefer one. But if there are four or five members in favor of a rate hike, Warsh would have more latitude to move to the rate-hike camp if he felt that way.

Implications for the Market

According to the CME Group's FedWatch tool, whether interest rates remain unchanged or increase by a quarter point was roughly a 50-50 split as of this writing. However, with Waller's comments, the stakes have been significantly upped, and the market may be more likely to expect a rate hike if the August inflation report comes in hot.

It's worth noting that an unprecedented 6-6 tie at the FOMC means interest rates by default would remain unchanged. However, with Waller's comments, it's possible that the market may be more likely to expect a rate hike, which could have significant implications for the market.

Conclusion

The August inflation report will be a crucial indicator of the Fed's decision on whether to raise interest rates. With Waller's comments, the stakes have been significantly upped, and the market may be more likely to expect a rate hike if the report comes in hot. The implications for the market will be significant, and investors will be watching closely to see how the FOMC responds to the report.