Federal Reserve Governor Christopher Waller stated on Tuesday that the recent string of robust economic data will allow the central bank to contemplate the necessity of implementing further increases in interest rates to manage inflation.
In an interview on CNBC’s “Squawk Box,” Federal Reserve Governor Christopher Waller expressed his enthusiasm, saying,
“Last week’s data was truly exceptional, and the pivotal takeaway from it is that it grants us the opportunity to proceed with meticulous caution.”
He further elaborated,
“We can simply maintain our position, exercise patience while monitoring the incoming data, and ascertain whether the trends persist.”
The unemployment rate experienced a notable rise, reaching 3.8%, a significant increase from the previous month and its highest since February 2022. Concurrently, estimates for nonfarm payrolls in previous months were revised downward significantly.
This uptick in unemployment coincided with an increase in the labor force participation rate, which reached 62.8%, marking the highest level since February 2020, just before the declaration of the COVID-19 pandemic. Notably, the total size of the labor force expanded by 736,000 individuals.
Furthermore, a more comprehensive measure of unemployment, which accounts for discouraged workers and those who are employed part-time due to economic reasons, surged to 7.1%. This represented a 0.4 percentage point increase and was the highest it had been since May 2022.
At the beginning of the week, additional reports indicated that the Federal Reserve’s favored inflation indicator increased by a mere 0.2% in July. Furthermore, a crucial measure of labor market tightness, job openings, declined to their lowest level since March 2021.
Waller Talks about Inflation
Waller emphasized that the most significant concern right now is inflation. They’ve received two consecutive positive reports. The crucial aspect is to determine whether this low inflation is a consistent trend or simply an isolated occurrence or anomaly.
Waller is typically regarded as one of the more hawkish members of the Federal Open Market Committee, indicating his preference for a more restrictive monetary policy and elevated interest rates. This stance aligns with the central bank’s efforts to combat inflation, which, during the summer of 2022, surged to its highest level in over four decades.
Although Waller found encouragement in the recent reports regarding the direction of prices, he also noted that these reports suggest the Federal Reserve can maintain higher interest rates until they are confident that inflation is under control.
Waller also emphasized the importance of data, stating that whether the rate increases can halt depends on the data. He emphasized the need to wait and observe if the current trend of inflation is persisting, as there have been instances in the past, such as in 2021 and the end of 2022, where inflation appeared to be decreasing but then experienced unexpected reversals or revisions.
Waller expressed caution, stating,
“I want to exercise great care in declaring that we’ve effectively addressed the inflation issue until we observe a sustained trend in this direction for a couple of months. Only then can we confidently say we’re finished with any further actions.”
Fed may not further rise rates in September
The markets are currently pricing in a high likelihood that the Federal Reserve will not raise rates at its September 19-20 meeting. However, there’s a 43.5% probability of a rate increase at the October 31-November 1 session, as indicated by CME Group’s tracking of futures pricing, suggesting some uncertainty.
Additionally, Goldman Sachs has recently stated its expectation that the Fed has completed its rate hikes. This reflects the ongoing uncertainty surrounding the Fed’s future monetary policy decisions.
Waller expressed his perspective, saying,
“I don’t believe that a single additional rate hike would automatically push the economy into a recession, should we decide to implement one. It’s not readily apparent that we’re at substantial risk of causing significant harm to the job market, even with just one more rate increase.”
Waller’s comments follow closely on the heels of Federal Reserve Chair Jerome Powell’s statement less than two weeks ago. Powell emphasized that inflation remains elevated and may necessitate further rate hikes. However, he also stressed that policymakers will approach any such moves with caution and care.