Federal Reserve Governor Christopher Waller said Thursday that an inflation report due next week will largely determine whether he supports an interest rate hike at the central bank's Sept. 15-16 meeting, muddying what had been a growing expectation of higher borrowing costs.
The government will release August inflation figures on Sept. 11. If that report shows continued cooling in price growth, Waller said he "would be inclined" to keep the Fed's benchmark interest rate unchanged at its current level. "But if inflation comes in hot, I would consider a rate hike," he added during remarks in Washington.
Waller noted that borrowing costs are only "slightly restricting" consumer and business demand, adding that "it may not take much acceleration in inflation to nudge me into supporting" a rate increase. His comments sent stock prices higher and bond yields lower as investors recalibrated their expectations.
What the Right Is Saying
Conservative economists and some Fed officials have pushed back against calls for rate cuts, arguing that inflation remains too elevated to justify easing monetary policy. "Inflation has not shown sufficient improvement," Fed Chair Kevin Warsh said last week at the annual economic symposium in Jackson Hole, Wyoming, signaling the central bank may have "more work to do."
Warsh's remarks contributed to a steady rise in longer-term bond yields this week that has lifted mortgage and auto loan rates for consumers. Several members of the Fed's rate-setting committee have voiced concerns that price increases are still too high.
Conservative commentators argue that premature rate cuts could reignite inflationary pressures, eroding purchasing power for ordinary Americans on fixed incomes or those saving for major purchases. They contend that the Fed must prioritize price stability above short-term political considerations and maintain credibility in its fight against inflation.
What the Left Is Saying
Vice President JD Vance reiterated the Trump administration's position Thursday that the Fed should be cutting rates rather than raising or maintaining them. "Our view, and this has been a consistent message from the president and the rest of the administration on down, is that we believe that the Federal Reserve should be lowering interest rates," Vance said at a White House briefing.
Vance pointed to inflation data as evidence supporting rate cuts. "We feel quite confident that if you look at the inflation numbers, if you look at the CPI numbers, that it's proper and responsible for the Federal Reserve to lower interest rates." The administration has consistently argued that lower borrowing costs would benefit consumers facing higher prices for mortgages, auto loans, and other credit products.
Progressive economists have echoed this view, arguing that elevated interest rates disproportionately harm working-class Americans by raising the cost of home purchases, car financing, and small business expansion. They contend that inflation is already on a downward trajectory and further rate increases risk triggering an unnecessary recession.
What the Numbers Show
Following Waller's comments, investors cut the odds of a rate hike at the September meeting from nearly 65% to roughly 50-50, according to CME FedWatch data. The swing reflects significant uncertainty heading into the Fed's decision.
Recent inflation readings have shown modest improvement. 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, annual inflation would move closer to the Fed's 2% target. However, last month's reading showed inflation staying at 3.7% on a yearly basis.
John Williams, president of the Federal Reserve Bank of New York, said Wednesday he has been encouraged by recent data but wants more evidence before declaring victory. "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," Williams told CNBC.
Bond yields have risen sharply this week, with the 10-year Treasury yield climbing to levels that have pushed mortgage rates higher. Joseph Purtell, a portfolio manager at Neuberger Berman, said September's meeting "is going to be knife edge and it's going to come down to how the CPI data prints."
The Bottom Line
Waller's comments underscore how uncertain the Fed's path remains heading into its September decision. What had appeared to be growing consensus around a rate hike has become a genuine toss-up, with traders now assigning roughly equal odds to hikes and holds.
The Sept. 11 inflation report will be critical. If August CPI comes in below expectations, it could cement support for keeping rates steady. A hot reading would likely tip the scales toward another increase. Investors should expect heightened volatility around the release date and the Fed's subsequent two-day meeting.
Warsh has sought to limit forward guidance from the Fed, arguing that explicit signals about future policy constrain the central bank's flexibility. That approach means markets face less certainty than in previous cycles about what policymakers intend to do.