Federal Reserve Governor Christopher Waller said on Thursday that he could support keeping interest rates unchanged in September if upcoming inflation data continues to show progress.
Waller said the current federal funds rate target of 3.50% to 3.75% could remain in place at the September 15-16 FOMC meeting if disinflation continues over the next two weeks.
Waller Opens Door to September Rate Hold
Waller’s comments immediately influenced financial markets.
US Treasury yields fell to session lows, while S&P 500 futures moved higher following his remarks.
Traders also reduced expectations for a September rate hike. Fed funds futures and swaps markets moved back toward roughly even odds between a rate increase and no change.
Fed Tone Turns More Data-Dependent
Waller’s position was noticeably less hawkish than the message delivered by Fed Chair Kevin Warsh at Jackson Hole on August 28.
Warsh had indicated that higher interest rates could still be necessary if underlying inflation failed to improve.
His speech pushed market expectations for a September rate hike to roughly 60% to 66%, up from around 35% beforehand.
Waller, however, described the pace of disinflation since February as encouraging.
Inflation Still Remains Above Fed Target
Despite recent progress, inflation remains well above the Federal Reserve’s 2% target.
Core Personal Consumption Expenditures inflation currently stands at 3.3% on a 12-month basis.
Waller stressed that he has not ruled out another rate increase.
He said that if inflation comes in stronger than expected, he would consider supporting a hike.
According to Waller, monetary policy is currently only slightly restrictive. As a result, even a modest acceleration in inflation could push him toward tighter policy.
August CPI Could Decide Waller’s Vote
Waller said his September decision will depend heavily on the upcoming August Consumer Price Index report.
That makes the next CPI release one of the most important economic events before the Fed meeting.
If inflation continues to cool, Waller would likely support keeping rates unchanged.
However, a stronger-than-expected inflation reading could shift his position toward another rate hike.
PCE Methodology Change Could Lower Inflation Reading
Waller also discussed an upcoming Commerce Department methodology adjustment related to financial-services fees.
He expects the change could reduce 12-month PCE inflation by a few tenths of a percentage point.
Waller described the adjustment as a welcome measurement correction.
He also noted that nonmarket services prices accounted for roughly half of July’s increase in core PCE inflation.
Because those prices are estimated rather than directly observed, Waller believes the current inflation data may overstate underlying price pressures.
HSBC Sees September Decision on a Fine Edge
Market expectations for Federal Reserve policy have changed significantly in recent weeks.
HSBC raised its forecast for the two-year Treasury yield to 4.20% by the end of 2026, up from 3.85%.
The bank also increased its 10-year Treasury yield forecast to 4.65%, from 4.30%.
HSBC now sees a nearly even chance of a 25-basis-point rate increase in September, reflecting growing uncertainty around the Fed’s next move.
Goldman Sachs Still Expects a Fed Hold
Goldman Sachs maintains a different view.
Chief economist Jan Hatzius continues to expect the Federal Reserve to keep rates unchanged in September.
Goldman believes a hike remains possible if August CPI and PPI data come in stronger than expected.
However, the bank expects core CPI and PCE inflation to rise by around 0.2% in August, which would likely support a hold.
Higher Rates Could Pressure the S&P 500
The September Fed decision could also have major implications for US equities.
A rate hike could add pressure to stocks during a month that has historically been challenging for markets.
Some analysts have warned that higher rates could increase the risk of a near-term correction in the S&P 500.
Goldman Sachs, however, continues to maintain a year-end target of 8,000 for the index.
Jobs Data and CPI Become Key Fed Catalysts
Two major economic releases now stand between markets and the September Fed decision.
The first is the August Nonfarm Payrolls report, scheduled for Friday, September 4.
Waller said he does not expect a major deviation from recent labor market trends, although a significant surprise could influence his outlook.
The more important release is the August CPI report on September 11.
Waller specifically identified that inflation reading as a key factor for his September vote.
Continued disinflation would strengthen the case for keeping rates unchanged. In contrast, a hotter inflation report could revive expectations for another rate hike.
With markets almost evenly divided, the September 11 CPI report could become the decisive signal for interest-rate expectations ahead of the FOMC meeting.
