MNI: Fed's Waller Backs 25BPS, Sees Continued Tightening Ahead

Federal Reserve Governor Chris Waller Friday said he favors another downshift at the next meeting ending February 1 to a 25bp rate hike but anticipates continued tightening going forward.

Last week's moderation in CPI growth was "very welcome news" that indicates that broader inflationary pressure across the economy is easing, he said in a speech.

"I currently favor a 25-basis point increase at the FOMC’s next meeting at the end of this month," he said. "Beyond that, we still have a considerable way to go toward our 2 percent inflation goal, and I expect to support continued tightening of monetary policy."

The Fed is widely expected to lower the size of its rate hikes further at its Feb. 1 decision. (See: MNI: Fed Rates Likely Headed Above 5% Despite Cooling CPI)

But Waller is not ready yet to substantially alter his outlook for inflation. "Back in 2021, we saw three consecutive months of relatively low readings of core inflation before it jumped back up. We do not want to be head-faked," he said. "I will be looking for the recent improvement in headline and core inflation to continue."

EYEING WAGES

Additionally, more evidence is needed for continued moderation of wages to sustainable levels that would also help ease overall inflation. "Over time, we need to see wages grow more in line with productivity growth plus 2 percentage points, consistent with the FOMC’s inflation target," he told the Council on Foreign Relations.

"While the labor market is strong, it is also tight," he said. "A potential downside of a tight labor market is if labor costs, which heavily influence inflation, grow so fast that they slow progress toward the FOMC’s 2 percent objective."

Economic activity has been "holding up well," he said, while expecting slowing to continue in this quarter, which is "both expected and desirable in our ongoing fight to lower inflation."

"Job one is maintaining the progress we are making in lowering inflation, and moderation in consumer spending will support that progress."

Waller said he remains optimistic progress can continue toward a soft landing bringing down inflation without seriously damaging the labor market.