Christopher Waller, U.S. President Donald Trump’s nominee for Governor of the Federal Reserve, listens during a Senate Banking Committee confirmation hearing in Washington, DC, Thursday, February 29. 13, 2020.
Andre Harrer | Bloomberg | Getty Images
Federal Reserve Governor Christopher Waller said on Friday he favored raising interest rates by a quarter of a percentage point at the next meeting as he awaits more evidence that the inflation is heading in the right direction.
Confirming market expectations, the central bank official told a Council on Foreign Relations event in New York that the Fed could scale back its rate hikes.
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But he also said it was not time to declare victory over inflation, likening monetary policy to an airplane that has climbed higher rapidly and is now poised for a gradual descent.
“And consistent with that logic and based on the data we have right now, there appears to be little headwinds ahead, so I currently favor a 25 basis point hike at the next FOMC meeting in the end of this month,” Waller said in prepared remarks. “Beyond that, we still have a considerable way to go towards our 2% inflation target, and I expect support for continued tightening of monetary policy.”
He didn’t say how far he sees rates heading and was scheduled to participate in a Q&A after the 1 p.m. ET speech.
Other officials, such as Philadelphia Fed President Patrick Harker, pointed to a 0.25 percentage point increase on Jan. 1. 31-Feb. 1 FOMC meeting, but Waller is the most senior member to be so explicit.
While the market and the Fed appear to be on the same page when it comes to the direction of near-term rates, there is a divergence further afield.
Central bankers have widely said they see rates holding high until the end of the year, while markets see a peak in the summer and then a decline soon after.
Waller said the divergence was largely about perceptions of where inflation is going.
“The market has a very optimistic view that inflation is just going to melt away. Pristine disinflation is going to happen,” he told CNBC’s Steve Liesman during a Q&A after the speech. “We have a different view. Inflation is not just going to miraculously melt away. It will be slower and harder work to bring inflation down and so we need to keep rates higher for longer and not start to cut rates at the end of the year.”
Waller was generally bullish on the economy, noting that activity has slowed in some key areas such as manufacturing, wage growth and consumer spending. He stressed that the Fed’s goal is not “to shut down economic activity,” but rather to bring it back into balance so inflation can begin to decline.
Over the past few months, inflation indicators such as the Consumer Price Index and the Fed’s favorite Core Personal Consumption Expenditures Price Index have come off their highs of last summer. But he noted that while the 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 while ago. a year”.
“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 a story about the future.”
But Waller said he still saw a possible “soft landing” for the economy, a scenario that would see “some progress on inflation without seriously damaging the labor market.”
“So far we have achieved this, and I remain optimistic that this progress will continue,” he said.