Fed’s Christopher Waller opens door to 50-basis-point December rate hike after hot CPI

Federal Reserve Governor Christopher Waller‘s remarks intensified the debate over a possible half-percentage-point interest-rate increase in December after US inflation data came in hotter than expected on Tuesday, Bloomberg reported.

In a speech delivered in London before the release of October’s Consumer Price Index, Waller said he was inclined to support a rate increase in December. He warned that a 50-basis-point move might be necessary if inflation continued to accelerate, arguing that the Fed’s credibility could otherwise be at risk.

Hours later, data showed that consumer prices rose more than expected. Core inflation, which excludes food and energy, increased 0.3% from the previous month, meeting the threshold Waller identified as grounds for considering a larger rate increase.

Also read: Traders raise odds of 50 bps Fed rate hike as CPI rise exceeds expectations

Waller’s remarks represent the clearest signal yet from a Fed official that policymakers may need to raise rates in December by more than the quarter-percentage-point move markets had expected.

Several senior Fed officials, including Vice Chair Philip Jefferson and New York Fed President John Williams, are scheduled to speak this week.
Fed watchers said Waller’s comments did not make a 50-basis-point move certain but would add urgency to the debate over how aggressively policymakers must act to contain inflation.“This is not a print that screams out the need to go 50, but certainly provides ammunition to the argument to do so,” Christopher Hodge, chief US economist at Natixis, told Bloomberg.

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Tom Porcelli, chief economist at Wells Fargo, said he expected the Fed’s policy-setting committee to support another rate increase unanimously, although the size of the move remained open for debate.

“This locks it down,” Porcelli said, referring to the likelihood of at least a 25-basis-point increase. “With Waller introducing that idea, the market is going to run with it in the face of this firm print.”

Following Waller’s remarks and the inflation report, investors priced in a more aggressive path for interest rates in the coming months. However, markets remained unconvinced that policymakers would deliver a half-point increase in December.

Federal funds futures continued to indicate a quarter-point move in December, followed by additional increases of the same size in January and possibly April. Investors had previously expected rate increases in December and March.

Waller described the US economy as strong and the labour market as stable but said inflation remained too high.

“If, as I expect, the monthly rate of inflation improves in October, I am leaning toward supporting an increase in our policy rate of 25 basis points,” Waller said.

“But if the October CPI inflation data out later today are similar to the past two monthly readings—with core CPI inflation around 0.3% or even higher—then a stronger policy move may be needed,” he added. “In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting.”

Under such a scenario, Waller said a conventional quarter-point increase would do little to reassure the public that the Fed was serious about controlling inflation.

“Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take,” he said.

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Hot CPI intensifies rate debate

Data released later by the Bureau of Labor Statistics showed that core consumer prices rose 0.3% in October from the previous month, while the headline CPI increased 0.4%.

Fed officials held interest rates steady last month, saying the “accumulation of more information” would help them determine the appropriate policy setting.

The 10-2 decision followed a unanimous vote in September to raise the benchmark rate by 25 basis points to a target range of 3.75% to 4%. Several policymakers have since indicated that additional increases may be necessary.

Data released last week showed that job growth accelerated in October while the unemployment rate edged lower. Fed officials will receive another employment report and a full set of inflation data before their December meeting.

During a question-and-answer session with Bloomberg’s Francine Lacqua after the speech, Waller said the Fed did not want to “slam the economy down.”

“It’s not that we’re going to jack up the policy rate 150 basis points or 200 basis points,” he said. “We are looking forward and saying we need to do something; at a minimum, probably take back the three insurance cuts that we put in last year.”

Waller added that monetary policy had not been “nearly as restrictive as I thought it was.”

(Disclaimer: This article is based on inputs from agencies. These do not represent the views of The Economic Times)