By Balazs Koranyi and Howard Schneider
FRANKFURT, May 22 (Reuters) - Federal Reserve Governor Christopher Waller, an influential voice in policymaking who until recently had advocated for lower interest rates, on Friday said the Fed should axe the "easing bias" from its policy statement and effectively open the door to a possible rate hike.
Waller said he wasn't advocating for a hike at this point, but felt that at the very least the Fed needs to keep the current policy rate in place until it is clear
inflation, which he worries is broadening and becoming more persistent, shows signs of returning to the Fed's 2% target.
"Inflation is not headed in the right direction," Waller said in remarks prepared for delivery to an economic forum in Germany. With recent data showing the Fed's preferred measure of inflation hitting 3.8% in April, and broadening across goods and services, "I would support removing the “easing bias” language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase," he said.
His comments quickly shifted bets in the direction of a Fed rate hike. Pricing in contracts based around the central bank's policy rate on Friday reflected about a two-in-three chance of a quarter-point interest-rate increase by the Fed's October meeting, and nearly even odds on a hike at the prior September meeting.
Before Waller's remarks, traders were betting on an initial rate hike by December.
"The next move, whether it is a hike or cut, will depend on the data. Removing the language about the extent and timing of additional adjustments would make this point clear," Waller said, a move he is prepared to make both because of high inflation and of emerging stability in a labor market that had driven his recent outlook for further rate cuts.
"I don’t see the prospect of a weakening labor market as the dominant force that should be guiding monetary policy in the months ahead," Waller said.
His comments amplify the dilemma faced by incoming Fed Chair Kevin Warsh, who was due to be sworn in just an hour after the comments by Waller, who was also a candidate to succeed outgoing Fed Chair Jerome Powell, were posted on the Fed's website.
Far from overseeing rate cuts, as many analysts felt Warsh would be doing until recently, he may now face strong support from among his colleagues at the June 16-17 meeting to push his first policy statement as chair in a hawkish direction. Three Fed officials dissented at the April meeting in favor of making the change then.
The Fed held interest rates steady at its last meeting and is expected to do so again when policymakers gather on June 16-17 for the first time under the new Fed chair.
Minutes of the April meeting showed a growing number of officials saying that rate hikes may be needed to counter inflation that seemed to be spreading beyond the narrow channels of high oil prices or the influence of import taxes imposed by President Donald Trump.
(Reporting by Howard Schneider; Editing by Chizu Nomiyama and David Gaffen)
