Market-implied odds for a rate hike at the Sept. 15-16 meeting dropped to 48.4%, down roughly 15 percentage points from Wednesday, according to the CME Group’s FedWatch gauge. The shift reflects traders reading Waller’s remarks as a meaningful signal that the FOMC may pause rather than tighten further.
A Divergent Read on the Same Data
Waller’s position contrasts with Warsh’s speech at the Fed’s annual symposium in Jackson Hole, Wyoming, where the chairman said softer monthly inflation readings “do not tell me that underlying trends have meaningfully improved” and warned that “we have work to do” if trends don’t cooperate. Markets had taken those comments as hawkish and quickly priced in a strong possibility of a hike at the upcoming meeting.
Waller offered a different take. Though headline inflation stood at 3.7% and core at 3.3% for July, he argued the underlying trends are “better than the core numbers suggest” and that annual figures “are not the best guide for where inflation is today.” He pointed to the three-month inflation rate on the Fed’s preferred gauge, which has fallen from 4.76% in February to 3.05% currently.
“That is a considerable improvement, and the speed of this downward trajectory is encouraging,” Waller said in remarks prepared for a Reuters interview.
Give Disinflation a Chance
While conceding that inflation remains “meaningfully above” the Fed’s 2% target, Waller said recent trends “suggest we are finally seeing some signs of disinflation.” He expressed confidence that tariff impacts have likely been muted and that higher energy prices have not substantially spilled over into other parts of the economy.
“I’m going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting,” Waller said. “What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%.”
The policymaker added caveats. “I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy,” he said. “If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes.”
Next Week’s Data Is the Decider
The only major inflation reports the Fed will receive before the September meeting are the consumer and producer price indexes the Bureau of Labor Statistics will release next week. Both feed heavily into the Commerce Department’s personal consumption expenditures price index, the Fed’s main inflation barometer.
Waller said certain “nonmarket services prices” that are estimated rather than observed could be pushing reported inflation higher than underlying pressures warrant. He also noted that upcoming revisions to the Bureau of Economic Analysis’ PCE methodology are expected to take earlier 2023 inflation readings lower.
“If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,” Waller said.
What Happens Next
The September rate decision now hinges almost entirely on the CPI and PPI prints due next week. A soft set of numbers would likely cement a pause, while any upside surprise could flip Waller — and possibly other governors — back toward a hike. Watch the FedWatch gauge for real-time repricing as the data lands.
Waller’s split with Warsh also raises a broader question about FOMC cohesion heading into the fall. If the committee’s two most prominent public voices are reading the same inflation data so differently, the September meeting statement and dot plot will carry unusually heavy weight as a signal of where the consensus actually sits. Investors should expect elevated volatility in rates markets until the CPI print clarifies which reading of the data the committee as a whole adopts.
— Hiro Tanaka, markets desk, AXO News