Fed’s Waller says hot August CPI could trigger rate hike, September hold still on table

Federal Reserve Governor Christopher Waller on Thursday (September 3) said he would support keeping the federal funds rate at 3.50%-3.75% at the September 15-16 policy meeting if incoming data continues to show disinflation, putting the focus on the US August inflation report due a week before the decision.

Waller said his vote would be “heavily influenced” by the August consumer price index (CPI) report, scheduled for September 11. A further moderation in inflation would support a rate hold, while a stronger-than-expected reading could lead him to back a rate increase.

“If inflation comes in hot, I would consider a rate hike,” Waller said during a Reuters NEXT Newsmaker Interview in Washington.

His comments pushed Treasury yields lower and lifted S&P 500 futures, while traders reduced expectations for a September rate increase. Fed funds futures and swaps markets were pricing the chances of a hike at about 50%.

 

Waller leaves room for a hike

Waller said the pace of disinflation since February had been encouraging, although 12-month core personal consumption expenditures (PCE) inflation remained at 3.3%, above the Federal Reserve’s 2% target.

He said monetary policy was currently only slightly restricting aggregate demand, meaning an increase in inflation could change his view.

Waller also pointed to a forthcoming Commerce Department change to the methodology used to estimate financial-services fees. He expects the change could reduce 12-month PCE inflation by a few tenths of a percentage point.

He said non-market services prices, which are imputed rather than directly observed, accounted for about half of July’s increase in core PCE inflation. The change in methodology could therefore alter the reading of underlying price pressures.

Waller’s comments differ from the message delivered by Fed Chair Kevin Warsh at Jackson Hole on August 28. Warsh said rates could need to rise if underlying inflation did not show further improvement. Market expectations for a September hike subsequently rose to about 60%-66%, from around 35%.

 

Jobs and CPI data ahead of Fed meeting

The next key economic release is the August non-farm payrolls report, due Friday, September 4. Waller said he expects the labour market data to remain broadly in line with recent trends, although a significant surprise could affect his view.

The August CPI report on September 11 will come five days before the Federal Open Market Committee meeting. Waller has identified the report as the main factor that will determine his September vote.

Economists remain divided. HSBC has put the probability of a 25-basis-point September hike at close to 50%, while Goldman Sachs chief economist Jan Hatzius continues to expect the Fed to leave rates unchanged.

Hatzius said a rate increase would be possible if August CPI and producer price inflation came in higher than expected, but maintained his forecast for core CPI and PCE inflation to rise by about 0.2% in August.

The competing forecasts leave the August CPI report as the main market test before the Fed announces its decision on September 16.