Fed's Waller notes inflation easing signs, keeps options open for September

Federal Reserve Governor Christopher Waller has indicated he is observing initial indications of disinflation in recent economic data, while stopping short of ruling out further tightening. Speaking publicly, he outlined several positions.

• Would be prepared to keep rates unchanged at the September meeting if inflation moderates.
• Finally observing some signs of disinflation in recent data.
• Communicating his reaction function helps the public plan.
• Would consider a September rate hike if August inflation data comes in hot.
• Inclined to support holding rates steady at the September 15–16 meeting if August inflation data shows continued progress.
• It may not take much acceleration in inflation to support tighter policy.
• If August inflation data shows progress has reversed, a “small adjustment” to the policy rate would help ensure progress resumes.
• GDP is growing at a solid pace, while equity price gains should sustain consumption growth.
• Considerable uncertainty surrounds the outlook for prices and the economy because of military conflicts, trade policy and AI.
• Inflation remains significantly above the Fed’s 2% target.
• AI investment is a legitimate part of GDP, and AI will reliably raise productivity.
• Elevated energy prices and tariffs are not significant sources of ongoing inflation pressure.
• Underlying inflation is doing better than the core numbers suggest.
• The labor market is in satisfactory shape; expects more of the same in the August jobs report.
• Sees some upside inflation risk, though wage growth is consistent with inflation returning to 2%.
• Core PCE is not the best guide to where inflation stands.
• Sees considerable improvement, with an encouraging pace of progress in three-month core inflation.
• Pending revisions to the Commerce Department’s non-market price estimate could lower 12-month PCE inflation by a few tenths of a percentage point.

Waller is keeping his options open ahead of the September meeting, with the August inflation data likely to decide which way he leans. If inflation continues to show progress, he would support keeping rates unchanged. However, if the data comes in hot, a rate hike is on the table—and he warns it may not take much acceleration in inflation to justify tighter policy.

The good news is that Waller sees underlying inflation doing better than the headline core numbers suggest. The concern is that inflation remains well above the Fed’s 2% target, while growth and the labor market remain solid. Putting it another way, Waller is comfortable waiting if inflation cooperates, but prepared to hike if it does not. Rate cuts are not the message from these comments.

The US yields are pushing to the downside with the 10 year down -320 basis points at 4.756%. The 2 year yield is down 5.4 basis points at 4.331%.

US stock prices are also ticking to the upside (but modestly) with the Dow up 223 points in premarket trading. The S&P is p 8.4 points. The Nasdaq is still modestly lower by -12 points.