MNI: Waller: Job Boom Could Mean Terminal Fed Rate Over 5.4%

A persistently hot labor market could force the Federal Reserve to raise interest rates more than officials and investors currently expect, Governor Christopher Waller said Thursday.

“If job creation drops back down to a level consistent with the downward trajectory seen late last year and CPI inflation pulls back significantly from the January numbers and resumes its downward path, then I would endorse raising the target range for the federal funds rate a couple more times, to a projected terminal rate between 5.1 and 5.4%,” Waller said.

“If those data reports continue to come in too hot, the policy target range will have to be raised this year even more to ensure that we do not lose the momentum that was in place before the data for January were released.” (See MNI INTERVIEW: Fed Could Hike Rates More Than Expected-Hoenig)

Waller said he was taken aback by a string of economic data including the creation of more than half a million jobs in January and inflation readings pointing to stubborn price pressures.

JOB MARKET 'UNSUSTAINABLY HOT'

“Recent data suggest that consumer spending isn’t slowing that much, that the labor market continues to run unsustainably hot, and that inflation is not coming down as fast as I had thought,” Waller said in prepared remarks to the Mid-Size Bank Coalition of America.

A booming job market where openings far outpace the number of unemployed workers is making the Fed’s job more difficult, he said.

“An excessively tight labor market complicates the path toward achieving price stability, because wages are growing faster than they have in decades, at a pace that may contribute to keeping inflation elevated,” he said. “We see this excess pressure in the fast growth of services prices, where labor costs are a higher share of overall input costs and shortages of workers are reportedly most acute.”