Waller's dovish remarks lift stocks, trim September rate hike odds

Market impact:

• Waller notes disinflation is finally appearing in recent data, and markets respond
• Stocks climb, yields fall and the dollar weakens after Gov. Waller's comments

Waller's comments landed as markets had priced in a 60-67% chance of a September rate increase following Chair Kevin Warsh's hawkish Jackson Hole speech on 28 August. The move therefore represented a repricing from that baseline rather than an independent dovish signal. Treasury yields fell to session lows and S&P 500 futures rose immediately after the remarks, with the rally extending through the cash session to produce the best equity close in several weeks. The CME FedWatch-implied probability of a September hike dropped to roughly 54.6% right after the comments and has since eased further toward 50%, per the most recent reading. The remarks narrow but do not bridge the difference between Warsh and Waller, leaving the upcoming August CPI report as the deciding factor for the 15-16 September meeting.

Waller's pushback against the hawkish Fed narrative has pulled rate-hike odds toward a coin flip and gave Wall Street its best session in weeks.

Summary:

• Fed Governor Christopher Waller said on Thursday that he would back holding interest rates steady at the 15-16 September FOMC meeting if incoming data continue to show disinflation.
• His comments came against a backdrop of hawkish Fed rhetoric after Chair Kevin Warsh's 28 August Jackson Hole speech drove September rate-hike odds to 60-67%.
• Waller argued the three-month annualized inflation trend, which fell to 3.05% from 4.76% in February, is a more reliable guide than annual figures, calling the improvement "considerable" and its pace "encouraging."
• He said policy is currently "only slightly restrictive" and left open the possibility of supporting a hike if inflation data come in hot.
• CME FedWatch-implied odds of a September hike dropped to about 54.6% immediately after the remarks and have since eased further to near 50%, per the latest reading.
• US equities had their strongest session in weeks on Thursday, with the S&P 500 up 1.06%, the Nasdaq up 1.4%, and the Dow up 624 points (1.18%).

Federal Reserve Governor Christopher Waller said on Thursday that he would support leaving interest rates unchanged at the central bank's 15-16 September policy meeting if upcoming data continue to show inflation cooling—a statement that pushed back against a market that had been leaning toward expecting a hike. That hawkish tilt had built since Chair Kevin Warsh's Jackson Hole speech on 28 August, in which he argued that softer inflation readings did not tell the full story—comments that pushed market-implied September rate-hike odds to between 60% and 67%. Waller's remarks on Thursday countered that framing directly, though without dismissing the case for tighter policy. He argued that annual inflation figures overstate the current trend, pointing instead to the three-month annualized rate on the Fed's preferred gauge, which has fallen to 3.05% from 4.76% in February. He called that pace "considerable" and said the speed of the move was "encouraging." Waller also said current policy, at a 3.50%-3.75% target range, is "only slightly restrictive" and made clear he would still consider a hike if the upcoming August CPI print, due the following week, comes in hotter than expected.

The market reaction was immediate. Treasury yields dropped to session lows and S&P 500 futures moved higher as soon as the comments were released. The CME Group's FedWatch tool showed the implied probability of a September hike falling by roughly 12 percentage points in the immediate reaction, to about 54.6%, and that probability has since eased further, sitting near 50% as of the latest reading. That repricing carried through the full session, with the S&P 500 closing up 1.06%, the Nasdaq Composite up 1.4%, and the Dow Jones Industrial Average up 624 points (1.18%) in one of the strongest sessions for US equities in weeks.

The remarks should be seen as a data-conditional counterweight to Warsh's framing rather than a fixed dovish position. Waller's own language kept a hike squarely on the table, and the coming inflation report—not Thursday's comments alone—will determine which side of the debate prevails heading into the September meeting.

Sentiment had already been turning bullish earlier in the day during Asian trading hours ahead of the US session. A Wall Street Journal report said President Trump was privately considering whether to declare the Iran war over, believing sustained economic pressure could ultimately force Tehran to dismantle its nuclear program or lead to the regime's collapse.

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The report noted this was Trump's own preferred framing, according to people familiar with internal discussions, even as the Pentagon separately extended troop deployments in the region into 2027. That story, circulating through the Asian session, added a further layer of risk appetite heading into Thursday's US trade, ahead of Waller's remarks later in the day.