The Fed governor said hikes "do not need to come at consecutive meetings" and warned that five and a half years of above-target inflation could shift expectations. Futures price about a 17% chance of an October move and about 85% by December.
| SHY, IEF, TLT, UUP, XLF
Federal Reserve Governor Christopher Waller left little doubt on Thursday about where he thinks interest rates are heading. He left the timing open on purpose.
"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal," Waller said in remarks prepared for an event in Istanbul. "But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time."
The Fed raised its benchmark range to 3.75% to 4% in September, its first increase in three years. It meets twice more this year, on and 28 and in December.
Destination and speed
The speech separates two questions that markets tend to fold together. On the destination, Waller was firm. "For at least the near term, policy will be focused on the inflation side of our mandate," he said. He noted that 16 of the 18 officials who submitted projections in September anticipated at least one more increase this year, and that four of those 16 expected two.
On speed, he deliberately loosened the link between meetings. A governor saying hikes need not be consecutive gives the committee room to skip October without signaling a change of direction.
That matches where traders already were. Futures priced about a 17% chance of an October increase at Wednesday's close, down from about 38% a week earlier. Waller himself cited market pricing as of Wednesday of an 85% chance of at least one increase by the December meeting and nearly 20% for two. By March 2027, he said, markets saw nearly an 80% chance of at least two increases and 33% for three or more.
Why he is worried
September's increase, in Waller's account, did not hinge on any single consumer price report. His case rests on a "preponderance of evidence over several months," with persistent pressures "swamping the fleeting signs of progress." By the time August data arrived, he said, "it was impossible to deny that inflation was still too high and not making sufficient progress toward our target."
Three forces worry him most. The first is energy, where costs tied to the Middle East conflict may persist into 2027 on his reading; the second is the artificial-intelligence build-out, which he said is "significantly driving up high-tech consumer prices"; the third is threatened tariffs. Core prices as measured by the personal consumption expenditures index rose 0.25% in August, he said.
His central concern is expectations. "I am concerned that the recent acceleration in inflation, after what soon will be five and a half years of it above the FOMC's target, will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation," he said.
On jobs, he was relaxed. The labor market was "solid and stable in September," and payroll gains were in the range of estimates of the breakeven pace needed to keep unemployment steady.
What Waller’s Timing Signals
One reading is that the path is set and only the calendar is open. A voting governor, the September projections and the minutes released Wednesday all point to further tightening, and Waller's wording keeps December live without forcing October.
Another reading is that the speech adds little that markets had not already priced. October odds were already below 20% and December odds near 85%, and the next move depends on inflation data and oil prices that no Fed official controls. Brent crude rose about 4% overnight, which is the kind of pressure Waller cited.
Next voices and data
Minneapolis Fed President Neel Kashkari speaks at 10:40 a.m. Eastern on Thursday and St. Louis Fed President Alberto Musalem at 1:40 p.m. Weekly jobless claims are due at 8:30 a.m. The September consumer price index on is the last major inflation report before the October meeting, and it will show whether December pricing near 85% holds.