“Sternly staring at inflation until it melts before our withering gaze is not an option,” he said with a sense of urgency.
By Wolf Richter for WOLF STREET.
Fed Governor Christopher Waller is getting nervous about inflation and doesn’t want the Fed to make the 2021 mistake again of waiting too long before hiking policy interest rates, and if the core components of the CPI report on Tuesday and the PPI report on Wednesday are “hot” again, “then the FOMC will need to consider tightening monetary policy in the near term,” he concluded his speech today.
Does “in the near term” mean the FOMC meeting later this month? Or the FOMC meeting in September? The calculus had been for rate hikes to start later this year. Now the July meeting is on the front burner? If CPI and PPI readings are hot this week, will there be a majority of voting members at the July meeting to vote for a rate hike?
“Inflation and monetary policy are at a crossroads,” he said in the speech.
“Sternly staring at inflation until it melts before our withering gaze is not an option,” he said with a sense of urgency.
He explained: “There are some crucial differences now compared with 2021, and there is still a credible case for inflation to begin to fall back to our 2 percent goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.”
Again, “in the near term.” What the heck does that mean? Does that mean he knows there’s a potential majority of voting FOMC members for a rate hike at the July meeting?
So now he has joined the chorus of FOMC members that see inflation as a bigger and growing risk and that are getting increasingly edgy about it, while the labor market is now “near full employment and stable,” as Waller said, and has recovered from the weakness last year, and has moved down in the rankings on the Fed’s worry list.
“When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation,” he said.
And he cited the inflation data and what was behind the acceleration.
Inflation, as measured by the year-over-year increase of the all-items PCE price index (red line in the chart below) which the Fed uses as yardstick for its 2% inflation target, reached 4.1% in May, more than double the Fed’s target. It has been above target since March 2021.
Without the energy price spike, inflation as measured by the “core” PCE price index, which excludes energy components and foods, rose to 3.4% (blue line). It has also been accelerating since May last year.
The “core services” PCE Price index bottomed out at a too-high level late last year and started accelerating again this year and reached 3.7% (yellow). Core services dominate consumer spending.
An inflation hawk would have clamored for rate hikes starting last fall – when the Fed began to cut rates. But there are no inflation hawks left on the FOMC.
“So, the question is, will core inflation continue on its upward trajectory, or has it reached a turning point where it will begin to decline back toward our 2 percent target? The direction it takes has very different implications for the path of monetary policy,” he said.
“I am committed to returning inflation to the FOMC’s 2 percent goal but also determined to avoid overtightening policy and risking a recession,” he said.
While he expects the all-items inflation indexes to decelerate, as the price of gasoline has started to decline from the spike, he “will be focused on core inflation, and on that count, there are recent signs of continued pressure on goods prices,” he said.
“Core intermediate goods prices tracked in the producer price index [PPI], which may feed through to PCE prices, have increased noticeably in recent months. Also, purchasing managers for manufacturing businesses reported in June that their input prices have continued to increase, the 21st straight month they said so,” he said.
“Overall, I am monitoring price movements and am alert to the risk that the increase in core inflation is a sign that inflationary pressures are spreading through the economy,” he said.
“The FOMC has to be ready to tighten monetary policy to prevent a repeat of the 2021-to-2022 inflation episode. But there are two differences between now and then that make me cautious about leaning too heavily on that experience to make this decision,” he said.
So Waller returns to his roots as a well-reasoned centrist on inflation, after his sojourn in the dove-camp: At the FOMC meeting on July 30 last year, he’d dissented from the FOMC vote that kept rates unchanged because he’d wanted a rate cut; and he dissented again at the January 2026 meeting, when the FOMC kept rates unchanged after three cuts at the prior meetings, and he still wanted another rate cut; and during that entire time in dove-camp, he wanted to be Fed chair.
Treasury yields rose across the board today.
The 1-year Treasury yield rose by 6 basis points to 4.12% today, the highest since June 2025. It is now 50 basis points above the Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its policy rates. The 1-year yield is pricing in the beginning of a rate-hike cycle:
The 10-year Treasury yield rose by 6 basis points to 4.62%:
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This could be the trigger.
Hold on. It’s going to be a wild ride!
I’ll believe it when I see it.
Great read. The Fed’s momentum has shifted to a tightening bias, and Warsh will use that momentum to tighten 25 bps in ‘25 & 25 bps in ‘26.
If the markets are pushing up rates, as they have been since the Fed started cutting, how is raising the fed rate going to make any difference? Consumer rates tied to the 10 year are already way up. And one of the biggest drivers of consumer rates is indirectly tied to out of control federal spending which the Fed can do nothing about other than create a bigger debt by requiring even more interest to go to the debt. I don’t see how they have much impact with their cuts and raises.
It seems to me that the rest of the committee has yet to buy into Chairman Warsh’s views of shutting up. I fear they love the sound of their own voices too much. it would be far better if they never said anything and allowed the market to price its assumptions, then act on the information in which they are confident. remember, one of the task forces is all about the data, which we all know has been substandard, at the very least.
Why commit to buy current rates when you’ll be locked into below market rates later…thats the thinking…so to sell their debt our government (all of us) have to pay buyers more…and more…
Raise the dam rates already and get on with it.
But they have avoided 102 of the last zero recessions with all of their “mistakes” so they feel justified.
I thought recessions were a required part of a healthy business cycle.
Where is it in the Fed mandate that their job is to avoid recessions? That opens so many cans of worms chiefly malinvestment and mark to fantasy accounting.
It’s a similar playbook as the late 90’s. All we need now is a flood of Asian money like the Asian Financial Crisis (half joking). So only question is can Warsh convince market there will only be a couple hikes? They did in the late 90’s. Then they cut a little, then they popped the bubble with a hiking regime. And when Jerome threatened a couple hikes in a senate hearing in 23′ markets quickly priced those in with a near 7% drop in one week. Obviously the market then went full melt up mode higher. So unless Warsh comes out and announces a hiking cycle I would think this price action is transient and could extend the bubble even more. Even spooz price action this summer looks like 96/97/98…. Anyone know if they dug out the actual binders for how to trade this. They must be dusty as heck.
“But we also must avoid repeating the same mistake we made in 2021 and 2022 by waiting too long to respond.”
Perhaps he can elaborate on the cut right before the 2025 election….I mean, since they’re independent and all that and he’s now big on mea culpas. It seems to me that went a log way in defeating any realistic chance of hitting their 2% target.
Avoiding the same mistakes? I think Wall Street is fully invested in them not only repeating those mistakes, but doing so on a much greater scale.
Would love your thoughts on how the AI company bond rush might be affecting the Fed members’ thinking on inflation.
WSJ story yesterday, “The Quarter-Trillion-Dollar Onslaught of AI Bonds Is Testing Investors’ Limits”
For example, if AI infrastucture spending is a key driver of inflation, and the AI companies are price insensitive on debt, would that require higher rate hikes to have an impact on inflation?
From the story: “Typically, companies try to keep investors happy to ensure that their borrowing costs are as low as possible. But the hyperscalers are in such a heated race for computing power that they appear prepared to issue tens of billions of dollars of bonds at any moment, regardless of market conditions and whether they might need to pay higher interest rates.”
If the longer term rates keep increasing, does the fed even have a choice?
It just seems like they are so far behind the curve with such a low rate bias that they will only make a piddly 25bps adjustment when they have no better option. Is fiscal reality creeping into the room?
It wouldn’t make a dent in inflation if they hike. You think the greedy f**king landlords are going to lower rents? You think insurance companies will lower premiums? You think electricity prices will go down? You think an 8 pack of Dial soap that was $3.99 ten years ago and is now $9.99 is going to get cheaper? They want inflation. Inflation increases corporate revenues. State and local governments love inflation. It now costs $100 to buy the same groceries that cost $50 in 2016, so they collect double the sales tax now. Then the politicians give themselves raises because of inflation. I think you should get 6% on a CD now, but I don’t think it’s happening anytime soon.