- Key takeaway: Federal Reserve Gov. Christopher Waller said the ongoing war in Iran and trade conflicts that could lead to new tariffs are shifting inflation risks higher.
- Expert quote: "If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2% goal." —Fed Gov. Christopher Waller.
- What's at stake: The FOMC is next scheduled to meet on Oct. 27-28.
Federal Reserve Gov. Christopher Waller said he expects short-term interest rates to rise if inflation does not show signs of easing.
Speaking at the Istanbul Economic Forum Thursday, Waller said additional rate hikes would help support "a timelier" return to the central bank's 2% inflation goal should inflation readings remain elevated.
"There is some flexibility about when those hikes will occur," Waller said. "The hikes do not need to come at consecutive meetings, but they should be in place within an acceptable period of time."
Waller said his shift in focus from the employment side of the central bank's dual mandate to inflation was the result of a "culmination of factors that developed over the past year," including higher energy prices and concerns that trade conflicts could trigger another round of tariffs.
For much of last year, Waller warned that risks
As of September,
"The unemployment rate remains relatively low and near the median of policymakers' projections of its longer-run level, while payroll gains are in the range of estimates of breakeven to keep the unemployment rate steady," he said.
Waller said he supported holding the policy rate steady through the spring and summer because he believed the inflation surge tied to the war in Iran would fade. That did not happen, however.
Waller said three forces "undermined [his] faith in this progress" and shifted his focus from employment toward the need to rein in inflation.
First, the conflict in the Middle East did not end quickly, and experts have warned that low inventories and damaged infrastructure could keep oil prices elevated through 2027.
Waller also cited evidence that the artificial intelligence buildout is driving up prices for high-tech consumer goods. Finally, he pointed to trade conflicts that could result in new tariffs and put upward pressure on inflation "yet again."
"In most cases, these were forces that became clearer as the year passed, swamping the fleeting signs of progress toward 2% inflation," he said. "When the first inflation reading for August came in hot just before the [Federal Open Market Committee's] September meeting, it was impossible to deny that inflation was still too high and not making sufficient progress toward our target."
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Waller said communications from Fed policymakers, including
"Between the SEP and policymakers' outlook speeches that encompass their interpretation of additional economic data, markets have interpreted that the Committee is likely to raise the policy rate 50 basis points in the coming months," he said.
According to Waller, federal funds futures prices as of Thursday showed markets were pricing in an 85% chance of at least one rate hike by the end of the FOMC's December meeting and nearly a 20% chance of two hikes. By the March 2027 meeting, markets were pricing in nearly an 80% chance of at least two hikes and a 33% chance of three or more.
"This signaling helps to anchor the path of short-term interest rates but provides flexibility in adjusting rate hikes based on incoming data," he added.
