Fed's Waller: Inflation data makes a 0.5% rate hike possible

Analyzing the latest inflation data, Christopher Waller, a member of the Federal Reserve Board of Governors, gets more reasons for why the Fed needs to raise interest rates as soon as its next meeting, which will be in December.

In Waller's view, a 50 basis point increase would be more than justified. At the same time, he doesn’t deny that it will be another step in the direction of a major tightening. The final decision on the interest rate, therefore, will be made only after Waller carefully examines both the jobs reports and the price consumption expenditures report.

Last week's Consumer Price Index report could finally satisfy Fed officials, as it showed that inflation is gradually decreasing. The rise in the price of many commodities has stopped. And the price of core goods fell for the first time since March. However, according to Waller, the conclusions can’t be drawn from only one report, as the inflation rate is still at a high level. So it’s necessary to wait for prices to fall further and for a new report like this one.

At the moment, the Fed Funds Rate is 3.75-4%. However, Waller understands that the higher the interest rate, the more arguments there are for lowering it.

The interest rate is only expected to rise by 50 basis points, which means the rate pace is slowing. According to Waller, the Fed will raise the rate until the rate reaches the optimal level. At this point, it’s difficult to predict this level, as officials' decisions to raise are influenced by constantly changing data.

The result of the monetary policy measures will only be visible in a couple of months, as the policy has a cumulative effect. For this reason, the rate is expected to peak before inflation declines.

Waller notes that the December hike, as well as subsequent Fed decisions, will greatly affect the future of the economy. For now, he assumes that inflation is still putting a lot of pressure on the economy, thus, stopping interest rate hikes isn’t an option for the Fed. Moreover, Waller believes, in order to bring inflation down to the 2% target, the Fed will increase interest rates further.