WASHINGTON (AP) — Federal Reserve governor Christopher Waller said Thursday that an inflation report next week will largely determine whether he supports an interest rate hike later this month or not.
The government will release August inflation figures Sept. 11, and if that report shows inflation continues to cool, then Waller said he "would be inclined" to keep the Fed's benchmark interest rate unchanged.
"But if inflation comes in hot, I would consider a rate hike," Waller said. Borrowing costs are only "slightly restricting" consumer and business demand, he added, "and it may not take much acceleration in inflation to nudge me into supporting" a rate hike.
Waller is an outspoken member of the Fed's seven-person governing board, and his remarks suggest that a rate hike later this month is not a done deal. Stock prices rose and bond yields fell in response. Several members of the Fed's rate-setting committee have voiced concerns that price increases are still too high, suggesting that a rate hike may be needed. Yet others have said inflation is slowly cooling and higher borrowing costs aren't necessary.
Fed Chair Kevin Warsh said last week at the Fed's annual economic symposium in Jackson Hole, Wyoming, that inflation had not shown sufficient improvement and that the central bank might have "more work to do," a sign he is weighing a rate increase at the Fed's next meeting Sept. 15-16.
Wall Street investors sharply increased their bets on a rate hike this month after Warsh's speech. Some bond yields that also moved higher on Warsh's remarks, raising the stakes for the September meeting.
Waller suggested he has been encouraged by signs that inflation had slowed over the past two months. According to the Fed's preferred gauge, prices ticked down 0.1% from May to June and rose just 0.2% from June to July. At that pace, inflation would move much closer to the Fed's 2% annual target.
September's meeting "is going to be knife edge and it's going to come down to how the CPI data prints," Joseph Purtell, portfolio manager at Neuberger, said, referring to the government's primary measure of inflation, the consumer price index.
Warsh has sought to cut back on the signals the Fed sends about its next moves, which he argues limit the central bank's policy flexibility. As a result, there has been more uncertainty going into Fed meetings about what policymakers will do than in the past.
Purtell said Warsh could probably command a majority in favor of either keeping rates unchanged later this month or raising them.
Last month, the government said inflation stayed at 3.7% on a yearly basis, according to the Fed's measure.
In an interview with Reuters following his remarks, Waller acknowledged he is heavily focused on one upcoming report. But he said looking at near-term data is necessary to pick up on any changes in trends.
"I'm willing to sit and wait and be patient" to see if the next inflation report also shows it declining, Waller said. "But if it reverses, then you know it's time to pull the trigger and hike rates."
On Wednesday, John Williams, president of the Federal Reserve Bank of New York, said he has also been encouraged by recent inflation data but would like to see more evidence that it is declining, suggesting he would also be willing to keep rates steady this month.
"I think that we have to wait and see," Williams said in an interview on CNBC. "There's no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that."