Federal Reserve Governor Christopher Waller, in a speech delivered in New York on the 13th, stated that the Fed should exercise prudence in addressing inflation, avoiding hasty interest rate adjustments due to over-learning historical lessons. He simultaneously emphasized that, with inflation facing multiple upside risks, the Fed retains the option to tighten monetary policy in the near term.
This commentary comes amid intense market focus on the future direction of Fed policy. Waller noted that the current drivers of US inflation have moved beyond traditional factors like rising energy prices and tariff impacts. The spillover effects of new demand, represented by artificial intelligence (AI), are providing structural support to prices, causing inflation to persist above the Fed's established 2% target.
Regarding the future path of monetary policy, Waller stressed that policymakers must avoid repeating the mistakes of 2021 and 2022, where a delayed response led to inflation spiraling out of control. However, they must also guard against "fighting the last war"—implementing rate hikes prematurely in the current phase solely due to past errors. He believes that the current US labor market remains robust and is not a primary driver of inflation, and market inflation expectations remain stable. This provides the Fed with a window to observe more economic data.
Nevertheless, Waller issued a clear warning that markets should not be overly optimistic about the inflation trajectory. He pointed out that the Fed cannot count on inflation subsiding on its own without policy intervention. If future data shows prices remaining stubbornly high or even rebounding further, the Fed would not hesitate to adopt a more restrictive monetary policy stance in the short term.
Currently, the US Bureau of Labor Statistics is set to release the Consumer Price Index (CPI) for June. Market consensus predicts that, influenced by earlier declines in crude oil prices, the year-over-year increase in the headline CPI for June is expected to ease to 3.8% from 4.2% in May. Addressing this, Waller acknowledged that even if June core inflation data shows improvement, given the price trends in the first half of this year, the Fed would need to see low inflation readings for several consecutive months to be confident that inflation is moving in the right direction. Until then, maintaining the current interest rate range remains a reasonable choice.
The Federal Reserve will hold its next monetary policy meeting in late July. The latest data from the Chicago Mercantile Exchange (CME) shows that the market currently prices in approximately a 39% probability of a Fed rate hike at the July meeting.
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