Fed's Waller channels his inner John Lennon with a plea to 'give disinflation a chance'

Ahead of Waller's remarks, investors had been pricing in solid odds of a quarter-percentage-point rate hike this month. A wide range of central bank officials has voiced concern about inflation in recent weeks, with some calling for rate hikes and others signaling openness to action to bring what have been persistent above-target price pressures back to the target. That hawkish turn followed dissents by three Fed policymakers against the central bank's decision to leave rates unchanged at the July 28-29 meeting. The dissenters favored a quarter-percentage-point hike. Speaking last week at the Kansas City Fed's Jackson Hole economic symposium in Wyoming, Fed Chairman Kevin Warsh indicated that if inflation pressures did not moderate, action by the central bank to ensure they did was likely. After Waller's remarks on Thursday, stock prices rose while yields on Treasuries fell. Traders also slashed rate-hike bets, with short-term interest-rate futures indicating the Fed is more likely to leave rates unchanged this month than raise them. The central bank, however, is seen as almost certain to deliver a rate hike by the end of this year. Waller's remarks suggest "he is leaning towards a hold" as long as the data supports it, analysts at Evercore ISI said in a note. His comments echo those that New York Fed President John Williams made to CNBC on Wednesday and challenge the idea that a rate hike is looming in the near term, they said. Williams said the latest inflation data has been "encouraging ... but again, we can't just look at a month or two" and be confident inflation is headed in the right direction. What the Fed will do with rates depends on the data and risk assessments, he added. Waller, however, said the data could also move in a way that would lead him to argue that the Fed needs to take action to control price pressures at its September 15-16 policy meeting. "If inflation comes in hot, I would consider a rate hike," he said. The Fed governor noted that the central bank's benchmark overnight interest rate, which has been in the 3.50%-3.75% range since December, is "only slightly restricting aggregate demand," and "it may not take much acceleration in inflation to nudge me into supporting tighter policy." Waller acknowledged that inflation is "meaningfully above" the Fed's 2% target, but said it "is making slow but continued progress on reaching" that level. He said an easing of inflation, measured by the change over three months in the Consumer Price Index on an annualized basis, would be the sort of move that would make him comfortable arguing for holding rates steady. He added, however, that he did not want to put a numerical estimate on his threshold for policy action. The U.S. Labor Department is scheduled next week to release the August CPI report, which will be the last major data on prices ahead of the next Fed policy meeting. While it is not the central bank's main inflation barometer, Waller said the CPI data will provide "a pretty accurate idea" of where the Personal Consumption Expenditures Price Index will come in. That index was up 3.7% in July on a year-over-year basis. Waller told the Reuters NEXT Newsmaker event that Fed policy can focus on inflation because of the solid performance of the overall economy and the relative stability of the labor market. The Labor Department is due to release its employment report for August on Friday. He buttressed his hopes that inflation will ease by noting that some of the factors recently driving up price pressures are not likely to continue. "I don't see elevated energy prices and tariffs now as a significant source of ongoing inflation pressure," Waller said. The impact of the increases in import tariffs has likely passed through the economy, and higher energy prices tied to the war in the Middle East do not appear to be bleeding into other prices, he added. But he noted that he did see some upside risks to inflation. "Energy prices have moved up again and remain significantly higher than they were at the beginning of 2026, and the economy faces both pressure on technology goods prices related to the AI buildout and the possibility of more tariff increases." Federal Reserve Governor Christopher Waller said on Thursday he is leaning toward keeping interest rates steady at the U.S. central bank's policy meeting this month if the next batch of inflation data shows price pressures are continuing to moderate. Pointing to the importance of "what we learn" about inflation data for August, Waller told a Reuters NEXT Newsmaker event in Washington that "if there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level." "I'm going to paraphrase John Lennon here. Give disinflation a chance" and refrain from prematurely raising rates to allow a cooling process to play out, Waller said. In terms of that patience, "I'm not going to say let's wait until next year, but let's just wait and see if we get some improvement on this."

Fed's Waller channels his inner John Lennon with a plea to 'give disinflation a chance'

Markets trimmed hike bets after the remarks

Rate hike remains possible if inflation is hot

Inflation and energy costs remain the key focus

Waller leans toward holding rates if inflation cools

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