Federal Reserve Governor Christopher Waller said on Friday that he favors raising interest rates by a quarter of a percentage point at the next meeting as he awaits further evidence that inflation is moving in the right direction.
It is confirmed market expectationsa central bank official said during a Council on Foreign Relations event in New York that the Fed may reduce the size of its rate hikes.
But he also said it was not time to declare victory on inflation, likening monetary policy to an airplane that has quickly taken off and is now set for a gradual descent.
“And in line with that logic, and based on the data we have at this point, there appears to be little turbulence ahead, so I currently favor a 25 basis point hike at the next FOMC meeting later this month,” Waller said in prepared remarks. “Furthermore, we still have a long way to go to our 2 percent inflation target, and I expect to support continued monetary tightening.”
He did not specify how high he sees rates heading and was scheduled to participate in a question-and-answer session after the speech at 1:00 PM ET.
Christopher Waller, U.S. President Donald Trump’s nominee for Federal Reserve governor, listens during a Senate Banking Committee hearing in Washington, DC, Thursday, Feb. 13, 2020.
Andrew Harrer | Bloomberg | Getty Images
Other officials, such as Philadelphia Fed President Patrick Harker, pointed to a 0.25 percentage point increase for the January 31-February period. 1 FOMC meeting, but Waller is the most senior member to make it explicit.
While the market and the Fed appear to be on the same page about where rates are going in the short term, there is an even bigger difference.
Central bankers have largely said they see rates holding high until the end of the year, while markets see a peak in the summer and a decline shortly thereafter.
Waller said the divergence is largely about perceptions of where inflation will go.
“The market has a very optimistic view that inflation will just melt away. There will be unblemished disinflation,” he told CNBC’s Steve Liesman during a question-and-answer session after the speech. “We have a different view. Inflation isn’t going to magically melt away. It’s going to be slower and harder to bring down inflation, and that’s why we need to hold rates longer and not start cutting rates until the end of the year.” .”
Waller was broadly bullish on the economy, noting that activity has slowed in some key areas such as manufacturing, wage growth and consumer spending. He emphasized that the Fed’s goal is not to “stop economic activity,” but rather to bring it back into balance so that inflation can begin to decline.
In recent months, measures of inflation such as the consumer price index and the Fed’s preferred price index of core personal consumption expenditures have reached their highs since last summer. But he noted that while headline CPI fell 0.1%, the index excluding food and energy still rose 0.3% and “is still too close to where it was a year ago.”
“So while it’s possible to take a month or three months of data and paint a rosy picture, I caution against that,” he said. “The shorter the trend, the bigger the grain of salt when swallowing the future story.”
But Waller said he still sees a “soft landing” for the economy, a scenario that would see “advancement in inflation without serious damage to the labor market.”
“We’re doing well so far and I remain optimistic that this progress can continue,” he said.