MNI: Fed's Waller 'More Comfortable' With 50 bps in December

Federal Reserve Governor Chris Waller on Wednesday said he was warming up to the idea of slowing the pace of rate interest rate hikes to 50 basis poins at the FOMC's next meeting in December, citing signs of dampening demand that will help bend the steep trajectory of inflation.

A "very welcome" moderation in CPI growth last week and some signs that the labor market may be loosening, along with the "significant, cumulative effect" of having already raised rates aggressively earlier this year, bolster the case for slowing the pace of rate hikes while "continuing to climb," he said.

"The data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike," he said in remarks prepared for an economics forecast luncheon in Phoenix, Ariz. (See MNI INTERVIEW: Fed Set For 'Lively Debate' At Dec. Meeting)

However, "we have not yet made enough progress," he said. "I expect that getting inflation to fall meaningfully and persistently toward our 2% target will require increases in the federal funds rate into next year. We still have a ways to go."

PEAK OF CYCLE

Even as core CPI decelerated to a 3.25% annualized rate last month, "it is way too early to conclude that inflation is headed sustainably down," Waller cautioned. With policy still "barely in restrictive territory today," more interest rate hikes are needed to get inflation down, he said.

At a certain point, policy will reach an "optimal cruising altitude," he said, "but we don’t know exactly what that level will be because it depends on the data." Inflation will determine whether the Fed continues to hike 50 bps each meeting or step down to 25 bp increments, and how long it keeps rates at their cycle peak, he said.

Due to an abundance of evidence that it takes months or even longer for the full effects of a rate increase to work through the economy, the Fed will likely hit its terminal rate well before inflation reaches 2%, Waller said.