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Fed Governor Christopher Waller says he’s ready to push rates beyond ‘neutral’ to fight inflation

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Christopher Waller, U.S. President Donald Trump’s nominee for Governor of the Federal Reserve, listens during a Senate Banking Committee confirmation hearing in Washington, DC, Thursday, February 13, 2020.

Andre Harrer | Bloomberg | Getty Images

Federal Reserve Governor Christopher Waller said Monday he expects interest rate hikes to continue throughout the year as part of an effort to bring inflation under control.

Specifically, the central bank official said he would support hikes above the “neutral” level considered neither supportive nor restrictive for growth.

Estimates from Fed officials provided in March point to a neutral level of 2.5%, meaning Waller sees rates rising at least another 2 percentage points from here.

“Over a longer period, we will learn more about how monetary policy affects demand and how supply constraints change,” Waller said in a speech in Frankfurt, Germany. “If the data suggests inflation is stubbornly high, I’m prepared to do more.”

The statements confirm the sentiment reflected in the minutes of the Federal Open Market Committee meeting on rate setting held in early May. The summary of the meeting said officials believe that “a restrictive policy stance may well become appropriate depending on how the economic outlook evolves and the risks to the outlook.”

Markets currently expect the Fed to raise benchmark borrowing rates to a range between 2.5% and 2.75%, consistent with a neutral rate. However, if inflation continues to rise, the Fed will likely go even further. The federal funds rate is currently set between 0.75% and 1%.

The minutes also indicated that policymakers see rates rising by 50 basis points at upcoming meetings. Waller said he agrees with that stance, as the Fed seeks to rein in inflation near its highest level in more than 40 years.

“In particular, I won’t be taking 50 basis point hikes off the table until I see inflation moving closer to our 2% target,” Waller said. “And, by the end of this year, I support keeping the policy rate above neutral so that it reduces demand for goods and labour, brings it more in line with the supply and thus helps to control inflation.

Data released on Friday indicated that inflation accelerated further in April, but at a slower pace. Core personal consumption spending, which is the Fed’s closest measure, rose 4.9% for the month from a year ago, from 5.2% in March. Headline PCE inflation, including food and energy costs, rose 6.3% from 6.6% the previous month.

Waller added that he believes the Fed can raise rates and reduce demand without causing a severe economic downturn. In part, the Fed’s objective will be to reduce the demand for labor without causing a large increase in the unemployment rate. There are currently 5.6 million more job openings than there are available workers, according to the Bureau of Labor Statistics.

“Of course, the trajectory of the economy depends on many factors, including the evolution of the war in Ukraine and COVID-19. Based on this discussion, I remain optimistic that the strong labor market can manage higher rates without a significant increase in unemployment,” he said.

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