Fed Governor Christopher Waller warns that a new high in core inflation would compel the central bank to tighten monetary policy in the short term. The decision will depend on the CPI published this week.
The Governor of the Federal Reserve, Christopher Waller, has opened the door to a new interest rate hike if inflation shows signs of acceleration again. In a speech delivered on Monday to the New York Business Economics Association, Waller warned that the Federal Open Market Committee (FOMC) may be forced to act if the core inflation data released this week is high again.
“If we record a high core inflation figure again this week, the FOMC will have to consider tightening monetary policy in the short term,” Waller stated. The central banker expressed being “concerned” about the “sustained” rise in prices, which in May pushed the overall CPI to 4.2% year-on-year, the highest level since April 2023.
Core inflation, key for the next decision
Waller emphasised that the direction inflation takes will have “very different implications for monetary policy.” Specifically, he noted that if core inflation — which excludes energy and food — shows signs of sustained moderation, it would be “appropriate” to maintain current rates. But if the figures are high again, “the FOMC will need to consider tightening in the short term.”
In May, core inflation stood at 2.9%, one-tenth higher than in April, according to data from the Bureau of Labor Statistics (BLS). This slight increase has raised alarms at the Fed, which has kept interest rates in a range between 3.5% and 3.75% since its last meeting in June.
The Fed's dilemma: between inflation and recession
Waller acknowledged the delicate balance the Fed must maintain: “I am committed to bringing inflation back to the FOMC's 2% target, but also to avoiding excessive tightening that could trigger a recession.” The governor warned that the Fed must not repeat past mistakes: neither reacting too soon, as in the last war against inflation, nor waiting too long, as occurred in 2021 and 2022.
Among the factors driving prices, Waller cited tariffs, energy prices, and the “strong demand” related to artificial intelligence, which has raised the cost of technological products such as semiconductors and servers. This last factor is new and adds additional pressure on inflation that the Fed had not clearly anticipated.
For Spanish investors and savers, Waller's statements have a direct impact: if the Fed raises rates, the dollar would strengthen, making crude oil and raw material imports more expensive for the eurozone. Additionally, a high-rate environment in the U.S. typically leads to capital outflows from emerging markets and puts upward pressure on yields of European sovereign debt.
“The Fed's decision will be key for global financial markets,” analysts state. The publication of the June CPI, scheduled for tomorrow, will be the thermometer that determines whether Waller and the rest of the FOMC choose to tighten monetary policy or maintain the pause. For now, futures markets are pricing in a moderate probability of a hike at the September meeting.
“If we record a high core inflation figure again this week, the FOMC will have to consider tightening monetary policy in the short term,” Waller expressed.
The Fed thus faces a complex scenario: on one hand, inflation resists falling to the 2% target; on the other, the labour market remains strong and the economy shows no clear signs of cooling. Waller made it clear that the institution is willing to act if the data demands it, but without rushing. The publication of the June CPI this Tuesday will be the first test.
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