Fed’s Waller signals possible September rate hike if August inflation rises

Waller’s View on Inflation and Policy Options

Waller, who serves as one of the voting members of the Fed’s rate-setting committee, commented during a Reuters NEXT Newsmaker interview that recent economic indicators have shown inflation moving in a positive direction toward the central bank’s 2% target. He stated that if this improving trend continues, he would support keeping policy rates steady at the upcoming FOMC meeting scheduled for September 15-16.

Waller highlighted a slowing trend in core inflation, noting that the three-month core price inflation rate had dropped to 3.05% through July, down from 4.76% in February. He described this moderating pace as encouraging, indicating that the Fed does not need to tighten policy prematurely. However, he emphasized that monetary policy remains only slightly restrictive. According to Waller, this gives the central bank scope to increase rates should inflation pick up again.

Waller made clear that “if there is continued progress toward our 2 percent goal, then I am willing to support holding the policy rate at its current level,” while acknowledging that a stronger-than-expected inflation result could lead to another rate hike.

Mini dictionary: FOMC, the Federal Open Market Committee, is the policy-making body of the US Federal Reserve responsible for setting interest rates and directing open market operations to achieve economic objectives such as stable prices and full employment.

Market Reaction and Crypto Implications

Financial markets responded quickly to Waller’s remarks. News agency reports indicated that traders reduced the odds of a September rate hike after Waller appeared open to holding rates steady, prompting US Treasury yields to decline and the US dollar to weaken.

Such shifts in Fed interest rate expectations have consistently influenced the digital asset market this year. For example, Bitcoin dropped below $78,000 following the July Personal Consumption Expenditures (PCE) inflation reading, which stayed above the Fed’s 2% goal. Conversely, when the Fed left its policy rate unchanged within the 3.50%-3.75% range in July, Bitcoin saw renewed upward momentum.

Potential Risks and Fed Strategy

Waller identified oil and energy prices as a remaining risk. Even though core inflation has declined, rising energy costs continue to pose an upside threat that could lead to higher transportation and production expenses. These factors could challenge the Fed’s effort to bring inflation back down to the 2% target.

The overall tone from Waller suggests a measured approach: although policymakers are more confident that inflation pressures are abating in the near term, they remain vigilant. He reiterated that if future data, especially the August inflation figures, indicate renewed price pressures, he would support another increase at the September meeting. If not, the Fed could pause tightening for the time being.

Waller pointed out that while some inflation risks have moderated, any short-term spike in price data would prompt a renewed debate among policymakers about further rate hikes.

The Fed’s evolving stance will remain a focal point for both traditional and digital financial markets as the September meeting approaches.