The Fed’s Waller Says He’d Hold Rates Steady — But His “If” Is Doing a Lot of Heavy Lifting
Fed Governor Christopher Waller just gave bond markets a reason to breathe easier, but buried inside his reassuring comments sits a single word that could unwind everything investors took from his speech.
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Investors have spent much of the summer trying to figure out which way the Federal Reserve will move next. Inflation remains well above the Fed’s 2% target, energy costs are adding another layer of uncertainty, and the bond market has been unusually sensitive to every hint about the path of interest rates. So when Federal Reserve Governor Christopher Waller spoke on Sept. 3, markets listened.
Bond yields moved lower and the odds of another rate hike eased after Waller indicated he could support leaving interest rates unchanged at the Fed’s September 15-16 meeting. That sounds like a welcome development for investors betting on a softer rate environment. But there is an important qualifier.
Waller isn’t promising a pause. He’s saying he would support one if the August inflation data due over the next two weeks continues to show evidence that price pressures are cooling. That little word could ultimately matter more than everything else he said.
Waller Is Willing to Wait — For Now
Waller acknowledged that inflation remains “meaningfully above” the Fed’s 2% target. July data showed headline inflation near 3.7% and core inflation around 3.3%. Those numbers aren’t exactly where the Fed wants them to be.
But Waller believes the recent trend is more encouraging than the year-over-year figures suggest. He sees evidence that underlying inflation is gradually moving in the right direction and believes the Fed can afford to wait for more confirmation before raising rates again.
His key comment was straightforward: “If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting.”
He even borrowed from John Lennon to make the point, saying, “Give disinflation a chance. We can wait one meeting.”
That’s a pretty clear argument for patience. But it’s also where the distinction between a dovish signal and an actual policy commitment becomes important. His “if” is doing the heavy lifting.
Waller views monetary policy as only slightly restrictive. If inflation proves more stubborn than expected, he doesn’t believe the Fed has to wait long before tightening further. That puts the upcoming inflation reports squarely in the driver’s seat.
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Markets Heard the Dovish Part
Investors, unsurprisingly, focused on the possibility of a pause. Following Waller’s comments, market-implied odds of a September rate hike fell roughly 12 percentage points to about 54.6%, according to CME Group FedWatch data. Bond yields also retreated as traders priced in a greater chance that the Fed will leave rates where they are.
The market reaction makes sense. Holding rates steady would give borrowers some breathing room and could take pressure off some of the most interest-rate-sensitive areas of the market. But investors shouldn’t confuse falling rate-hike odds with the inflation problem being solved.
Energy markets remain a potential source of trouble, with diesel crack spreads near record levels above $100 per barrel. Geopolitical risks could keep energy prices elevated, while services inflation has been stubbornly difficult to bring down. Any of those factors could make the August inflation data less cooperative than Waller hopes.
And that is why his comments shouldn’t be viewed as a green light for a broad market rally. They’re better understood as a reminder that the Fed is willing to wait — provided the data gives it a reason to wait.
The Next Inflation Report Matters More Than the Speech
If the August inflation numbers confirm continued disinflation, rate-sensitive investments could get another reprieve.
Homebuilders, utilities and longer-duration growth stocks typically benefit when investors expect interest rates to remain stable or move lower. The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and rate-sensitive technology stocks represented by the Invesco QQQ Trust (NASDAQ:QQQ) could also respond favorably to a softer rate outlook.
But the trade works in reverse. A hotter-than-expected August inflation report could send Treasury yields higher again and put pressure on the same groups that benefited from Waller’s comments.
But how likely is August inflation to give Waller what he wants? There are reasons for cautious optimism, but the path isn’t clear. Energy prices have moved higher, while services inflation remains sticky, creating potential sources of upward pressure in the August report.
Still, the data likely just needs to show that the recent improvement is continuing rather than reversing. That’s a relatively modest hurdle.
Key Takeaway
Waller gave markets something to cheer about, but he didn’t give investors a guarantee. His willingness to hold rates is genuine, and comes at a time when other governors seem to be leaning in the opposite direction. That’s why investors should focus less on the Fed governor’s willingness to “wait one meeting” and more on whether the data gives him permission to do so.
For investors, the message is simple: don’t trade the “if.” Watch the data that decides it.
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