MNI: Fed’s Waller-Resilient Economy Could Require More Hikes

The Federal Reserve has made enough progress on inflation to remain patient on monetary policy, although a stalling of disinflation or a reacceleration of economic growth could warrant additional interest rate increases, Fed Governor Christopher Waller said Wednesday.

“We can wait, watch and see how the economy evolves before making definitive moves on the path of the policy rate,” Waller told a conference sponsored by the European Economics and Financial Center.

“Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work. But if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run up in longer term rates.”

Waller, generally seen as on the more hawkish end of the FOMC, is sanguine about recent strides on inflation, noting that core PCE on a three-month annualized basis is already effectively down to the Fed’s 2% target. Still, he remains cautious about declaring victory prematurely.

MIGHT NOT CONTINUE

“The data in the past few months has been overwhelmingly positive for both of the FOMC’s goals of maximum employment and stable prices. There are a couple of reasons to be concerned that this progress might not continue,” he said. (See MNI INTERVIEW: Fed 'Sweating' Yields But Lean To Hike-English)

“I have been concerned since May about a resurgence of housing services inflation and (the August) number heightens my concern that housing services inflation has not slowed, and may not slow, to the rate needed to sustain a return to our 2%.”

At the same time, services inflation ex-housing, so-called super core, has risen around 0.5% in the last couple of months.

“This reading is not at a level needed to make progress toward our goal and we need to watch and see if these numbers indicate that inflation is reaccelerating,” Waller said.

The Fed has raised official interest rates aggressively over the past year and half to a range of 5.25-5.5%, their highest level in 22 years. Officials are widely expected to hold interest rates steady at their November meeting but keep open the possibility of a December move. The September Summary of Economic Projections indicated most officials envisioned one more hike by the end of the year, and expect to keep rates above 5% until at least the end of 2024.