Federal Reserve Governor Christopher Waller indicated Thursday he would support holding interest rates steady at the central bank's Sept. 15-16 meeting, provided incoming inflation data cooperates.
Market-implied odds for a rate hike at the September meeting collapsed to 48.4 percent following his remarks—a 15 percentage point drop from Wednesday, according to CME Group's FedWatch gauge. Rate-hold probability jumped to 51.6 percent.
Waller's dovish tilt directly contradicts Chairman Kevin Warsh's Jackson Hole speech last week, where Warsh said recent monthly inflation declines "do not tell me that underlying trends have meaningfully improved." Warsh signaled the Fed "has work to do" if disinflationary progress stalls. Markets initially priced in elevated odds for a September hike on those comments.
Waller expressed confidence in current disinflation trajectory, arguing tariff impacts have been muted and higher energy prices have not propagated broadly. "If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting," he said in remarks for a Reuters interview.
He conceded inflation remains "meaningfully above the Fed's 2% target" but noted three-month readings show progress. The Fed's preferred gauge slipped from 4.76 percent in February. July's headline inflation stood at 3.7 percent, with core at 3.3 percent.
Waller questioned the utility of a 25 basis point hike. "Hiking 25 basis points one meeting right now is not going to bring the CPI down to 2%," he said, adding that current policy is "only slightly restricting aggregate demand."
He built in escape clauses. "It may not take much acceleration in inflation to nudge me into supporting tighter policy," Waller cautioned. Evidence of reversed progress in August CPI or PCE data could flip his calculus, he said.
The Fed awaits consumer price index and producer price index reports next week. Both feed the Commerce Department's personal consumption expenditures price index, the Fed's primary inflation barometer.
