Waller warned that the August CPI data will be pivotal for his September vote, and he would consider supporting a rate hike if inflation remains elevated. Current policy constraints are "slight," meaning even a modest rebound could trigger a shift toward a more hawkish stance. Following his remarks, market expectations for a September rate hike eased slightly (by approximately 13 basis points), while U.S. Treasuries strengthened and the U.S. dollar came under pressure. Divergences within the Federal Reserve on interest rates and communication strategies are becoming apparent, with markets closely focusing on the CPI data to be released on September 11.
Federal Reserve Governor Waller warned that the August inflation data to be released next week would largely influence his voting stance at the upcoming policy meeting, stating he would consider supporting a rate hike if the data came in hot.
Speaking at an event hosted by Reuters on Thursday, Waller stated, "If inflation data comes in hot, I will consider supporting a rate hike," adding that even a "slight acceleration" in inflation could prompt him to shift toward a more restrictive policy stance. He also noted that recent data showed inflation was "finally showing some signs of cooling," though it remains significantly above the Federal Reserve's 2% target.
These remarks pushed Treasury futures higher, steepened the yield curve, and drove the U.S. Dollar Index to its daily low. Federal funds rate futures currently imply a probability of over 60% for a rate hike in September; however, following Waller's comments, market pricing for policy tightening in September eased slightly from 16 basis points to approximately 13 basis points, while cumulative pricing for rate hikes by year-end narrowed from 38 basis points to around 34 basis points.
Everything hinges on the CPI data to be released on September 11.
Waller explicitly identified the August Consumer Price Index (CPI) data, scheduled for release next Friday (September 11), as a key basis for decision-making. He stated that if the data shows continued progress toward the 2% inflation target, he would be willing to support holding rates steady; however, if this progress reverses, "a modest adjustment to the policy stance would help ensure inflation returns to a downward trajectory."
The Federal Reserve has held interest rates unchanged for five consecutive meetings, with officials set to convene again for a policy meeting in Washington on September 15–16. Waller believes that the current policy rate exerts only a "modest" restraint on the economy, implying that even a mild rebound in inflation could undermine his willingness to keep rates on hold.
Significant internal divergence exists, with various officials expressing differing views.
Prior to Waller's remarks, clear divisions had already emerged within the Federal Reserve. At the July meeting, three voting members of the Federal Open Market Committee (FOMC) voted in favor of a 25-basis-point rate hike, indicating that hawkish forces within the committee cannot be overlooked.
Federal Reserve Chair Walsh stated last week at the Jackson Hole Annual Economic Symposium that it remains unclear whether overall financial conditions are truly restrictive, noting that "there is more work to be done" if officials lack confidence in the inflation outlook. Governor Michael Barr also warned on Tuesday that after more than five years of inflation exceeding targets, there is a risk of entrenched price pressures, and the central bank should be prepared to raise rates this month.
In contrast, New York Fed President John Williams struck a relatively dovish tone, stating that there is evidence inflation continues to cool as the impact of tariffs fades, and that rising energy prices have not yet spilled over into other service sectors.
The Debate Over Communication Strategies Between Waller and Warsh
In his speech, Waller also clarified his stance on the central bank's external communication, which stands in sharp contrast to Warsh's style. He stated that effective monetary policy communication should revolve around three objectives: the current policy stance, the policy outlook, and forward guidance under specific circumstances.
Warsh had previously committed to reforming the central bank's communication with the public, including eliminating forward guidance and reducing the number of speeches and official statements. This strategy faced criticism from bond investors in July, who argued that Warsh failed to provide sufficient information on the economic outlook.
Waller expressed reservations about this approach. He acknowledged that forward guidance is not always applicable, stating, "but when it is truly needed, I believe it should be used." He emphasized that clearly communicating policy directions to businesses and households helps provide the public with clearer expectations.
Market Reaction: Treasuries Strengthen, Dollar Under Pressure
Markets reacted swiftly to Waller's remarks. Treasury futures rose to their daily highs, while yields on 2-year to 10-year notes generally declined by 2 to 3 basis points. The front and middle segments of the yield curve performed most strongly, with the 2/10-year and 5/30-year spreads both widening by more than 1 basis point to reach new daily highs. The US Dollar Index (DXY) fell approximately 0.5%, while the Japanese yen surged, with intraday gains reaching as high as 2%.
Market attention is currently heavily focused on two upcoming data releases: Friday's employment report and the Consumer Price Index (CPI) on September 11. Waller indicated that he expects the employment data to confirm that the labor market is in a "satisfactory state." Significant uncertainty remains regarding the policy direction in September before the inflation data is released.
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