LONDON — Federal Reserve Governor Christopher Waller said on Tuesday that he is leaning towards voting for an increase of 25 basis points in the policy rate of the Federal Open Market Committee at its December meeting, despite the expected improvement in October’s inflation data.
But it might not be the case. Should the October CPI release due later on Tuesday show an improvement in line with the previous two months’ releases, with core inflation coming in around 0.3 percent or even higher, Waller suggested that a more substantial action may be required.
“In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting. Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,”
September’s Numbers
Not much room has been left for a softer interpretation of the last complete month. “Let’s just say it. September’s inflation data were bad. There was no silver lining,” he said.
Prices based on personal consumption expenditures, the metric that the FOMC targets, increased 0.5 percent in September and grew 3.7 percent year-over-year, according to Waller. Core PCE inflation, which measures inflation excluding food and energy, increased 0.3 percent in September and grew 3.1 percent year-over-year.
His biggest concern is how broad the rises are becoming. Prices for core goods are high now, and prices for core market-based services excluding housing also are increasing. Over 70 percent of the components of the core PCE service prices increased above 3 percent year-over-year, he said.
Later on Tuesday, he will see whether this breadth remains high, whether prices for the high-tech goods connected with the AI buildout continue increasing rapidly, and whether the energy price increases start affecting other goods and services. Fed staff work on both issues does not suggest those pressures will fade soon, and the energy study he cited warns the effect could persist into 2027.
Why He Waited in October
Waller agreed with the majority of the FOMC that maintained the policy rate at the last FOMC meeting in October. At that moment, the markets had already priced in some tightening based on the Fed’s signals.
This is the case only if the rises come. “If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way,” he said.
Growth Strong, Hiring Slow
The remaining part of the economy, in his view, could withstand an increase in the rate. Real gross domestic product increased 3.4 percent in the third quarter on the back of robust consumption and investments, mainly in high-tech equipment related to the AI buildout. He expects growth to be moderate in the current quarter, as the spending is to slow somewhat.
The labor market has been robust, but not dynamic. Unemployment dropped to 4.1 percent in October, payrolls rose by 165,000 in October, and the six- and 12-month averages are closer to 80,000 jobs per month, he said, which is a pace consistent with the supply-and-demand equilibrium for labor.
However, for over a year, the hiring and firing activities have been unusually low, creating what he called “low hire, low fire” pattern, that he questioned at length. A stable labor market does not necessarily mean a healthy one, and the low turnover may affect negatively productivity and real wages in the long run, he said. In the near-term perspective, he still sees employment close to the maximum employment goal of the FOMC.
Waller’s statement is more hawkish than that of the president of the Richmond Fed Tom Barkin, who on Monday said that the Fed should change its policy carefully, with inflation as the main risk, according to Reuters, and he offered no base case for December.
The markets had been expecting the December action by the Fed before the speech by Waller. Futures contracts that settle to the Fed’s policy rate implied about an 85 percent chance of the rate hike at the December 8-9 meeting, to a new target range of 4.00 percent to 4.25 percent, as of Monday’s close, according to Reuters. The October CPI release brought them on his line: consumer prices rose 0.4 percent in October and core prices rose 0.3 percent, a third consecutive month with this rise, according to the Bureau of Labor Statistics report released on Tuesday.