A Hot Inflation Reading This Week Could Mean a Rate Hike Soon, Fed's Waller Says

By Greg Robb

While declining oil prices will likely bring headline inflation down, core readings excluding energy and food may be sticky

Federal Reserve governor Christopher Waller said inflation and interest-rate policy are at a crossroads.

There is a chance the Federal Reserve will need to raise interest rates soon if inflation readings this week disappoint, Fed governor Christopher Waller said Monday.

"If we get another hot reading on core inflation this week, then the [Federal Open Market Committee] will need to consider tightening monetary policy in the near term," Waller said, in a speech prepared for delivery to the New York Association for Business Economics.

Core inflation excludes volatile food and energy prices. The core personal-consumption expenditures (PCE) price index was running at a 3.4% annual rate in May, up from below 3% last October.

Waller did not yet seem convinced that rates will need to move higher.

"I am committed to returning inflation to the FOMC's 2% goal but also determined to avoid overtightening policy and risking a recession," he said.

Waller was one of four finalists to succeed Jerome Powell as Fed chair this year. His views on monetary policy have been influential since he joined the central bank in 2020.

Waller said there was "still a credible case for inflation to begin to fall back to our 2% goal with policy at its current setting."

But he added that he also sees "an equally credible case" that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.

The Fed has kept interest rates unchanged in a range of 3.5% to 3.75% all year.

Fed officials are divided over whether they will need to raise rates. At their June meeting, nine Fed officials penciled in a rate hike this year, with six pointing to more than one hike. But nine other officials projected the Fed could keep rates unchanged all year.

New Fed Chair Kevin Warsh did not make a forecast. Warsh will testify on the outlook before Congress on Tuesday and Wednesday.

The U.S. government will release June consumer inflation data on Tuesday at 8:30 a.m. Eastern time, with wholesale inflation data following on Wednesday.

Economists polled by the Wall Street Journal project inflation moderated in June as oil prices (CL00) fell last month after the U.S. and Iran reached a tentative cease-fire.

But with that cease-fire deal now crumbling, there is new concern that oil prices will spike and inflation will remain sticky.

The high inflation of 2021 continues to weigh on Fed officials. During that year, the Fed did not react to high inflation readings, thinking that inflation was "transitory."

Waller said the Fed needed to avoid overreacting and tightening too soon merely because it waited so long last time. But it also needed to avoid repeating the same mistake, he added.

Waller said he would be pleased to see lower core readings on inflation this week, but will need to see several months of lower readings to feel that inflation is moving in the right direction.

Core inflation is being driven higher by tariffs, energy prices and spillovers from demand fueled by the artificial-intelligence buildout, he noted.

"Sternly staring at inflation until it melts before our withering gaze is not an option," Waller said.

-Greg Robb

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