MNI: Waller Sees Fed Hikes 'Into Early Next Year'

Federal Reserve Governor Christopher Waller said Thursday he expects to raise interest rates "into early next year" to fight inflation and that market volatility and liquidity strains won't sap the Fed's resolve to do so.

With labor markets slowing a bit but "still quite tight," the September jobs report due Friday won't alter his view that the Fed should be 100% focused on fighting inflation, Waller said.

"As of today, I believe the stance of monetary policy is slightly restrictive, and we are starting to see some adjustment to excess demand in interest-sensitive sectors like housing. But more needs to be done to bring inflation down meaningfully and persistently," he said in remarks prepared for the University of Kentucky.

"I anticipate additional rate hikes into early next year, and I will be watching the data carefully to decide the appropriate pace of tightening as we continue to move into more restrictive territory."

SHELTER AND INFLATION

The Fed hasn't yet made meaningful progress on inflation, although interest-rate-sensitive sectors like housing are starting to see a step back in demand, the governor said.

Shelter prices, a particularly persistent component of inflation, rose 0.7% in August and will likely remain high for several more months. There is "a glimmer of hope" in the most recent readings of asking rents, which have stepped down a bit.

If the recent rate of shelter inflation continues, other core price increases will need to moderate to less than 0.2% a month to slow overall inflation down to around 3%, Waller said. That's three-tenths lower than in the last inflation report.

"This exercise shows why it is so important for the FOMC to maintain its focus on the appropriate path of monetary policy in order to moderate demand," he said.

MARKET STRAINS

While financial markets have experienced some increased volatility and liquidity strains, overall they are operating effectively and won't warrant a response from monetary policy, he said.

"I’ve read some speculation recently that financial stability concerns could possibly lead the FOMC to slow rate increases or halt them earlier than expected. Let me be clear that this is not something I’m considering or believe to be a very likely development," he said.

"We have tools in place to address any financial stability concerns and should not be looking to monetary policy for this purpose. The focus of monetary policy needs to be fighting inflation."

MNI reported this week Treasury market liquidity concerns is unlikely to lead to an earlier end to QT. (See: MNI: Fed To Press Ahead With QT Amid Liquidity Concerns)