Waller calls for raising interest rates 25 basis points — at least

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• Key insight: One of the leading monetary policy experts on the Federal Reserve Board is committed to a rate hike next month and could be willing to support a 50 basis point-increase if October inflation comes in at or above September’s level.
• Expert quote: “[If inflation does not improve from September], I believe a 50 basis point hike in the policy rate should be considered at the December meeting. Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.” — Fed Gov. Christopher Waller

At least one Federal Reserve official is ready to raise interest rates again, regardless of how October’s inflation reading comes in.

Fed Gov. Christopher Waller, in prepared remarks delivered in London Tuesday morning, said he anticipates supporting a rate hike at next month’s Federal Open Market Committee meeting, even if Tuesday’s consumer price index print shows inflation moving in a positive direction.

If October’s monthly CPI reading comes in at or above 0.3%, Waller said he would support “more robust action” by the FOMC — noting that anything short of that could call into question the committee’s resolve for taming inflation.

“In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting,” Waller said. “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”

The declaration all but locks in a hike during the FOMC’s next final policy-setting meeting of the year next month. During the FOMC’s meeting last month, two members — Gov. Lisa Cook and Federal Reserve Bank of Cleveland President Beth Hammack — voted against the decision to hold rates unchanged, arguing instead for a quarter-point increase in the federal funds rate.

Two other voting members of the committee, Federal Reserve Bank of Dallas President Lorie Logan and Federal Reserve Bank of Minneapolis President Neel Kashkari, have also argued for a more aggressive approach to reining in inflation. While both supported last month’s policy decision, they previously joined Hammack in dissenting to the FOMC’s July decision to leave rates unchanged. 

It is possible for the FOMC to hold rates unchanged even with five votes in favor of a hike, but the committee has not implemented a policy rate on a 7-5 split since 1983, according to data tracked by the Federal Reserve Bank of St. Louis.

In September, when the FOMC voted 12-0 to raise interest rates by 25 basis points, most FOMC participants — including both voting and non-voting members — expected to raise at least once more before the end of the year, according to the group’s quarterly summary of economic projections. 

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Markets have adopted this expectation. More than 84% of federal funds futures contracts were pricing in a December rate hike as of the end of the day Monday, according to the CME Group’s FedWatch tool

In his speech, Waller said he is concerned not only by the overall index increase in prices, but more specifically the categories of prices that have been on the rise as of late, including core goods and core market-based services excluding housing. He said these increases indicate that inflationary pressures are not only the result of acute supply shocks but indicative of a deeper trend.

Citing research conducted by Fed staffers into supplier expectations, he said there is a strong chance that end-prices continue to increase. He also said that even a swift end to the war with Iran, at this point, is unlikely to result in immediate relief on the cost of diesel, a key input expense for many goods. 

“To recap my economic outlook, economic activity is strong, the labor market is stable, but inflation is too high, well above the FOMC’s 2% goal,” he said. “This means that even if, as I expect, the monthly rate of inflation improves in October, I am leaning toward supporting an increase in our policy rate of 25 basis points at the FOMC’s December meeting.”