Federal Reserve Official Warns of Possible Rate Hikes if Inflation Persists

Federal Reserve Governor Warns of Potential Rate Hike Amid Rising Inflation Concerns

Federal Reserve Governor Christopher Waller has expressed support for making clear that the central bank's next interest-rate move is just as likely to be an increase as a cut. This stance comes as the energy shock from the Iran war continues to push up prices, leading to concerns about inflation.

Waller's current position is to be patient in holding rates until the war's impact is clearer. However, he warned that he wouldn't rule out a future rate hike if inflation doesn't start to slow soon. In a speech delivered at a conference in Frankfurt, titled "Policy Risks Have Changed," Waller stated that inflation is not headed in the right direction and that he would support removing the "easing bias" language in the policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.

The oil shock could dissipate soon, but Waller added that he can no longer rule out rate hikes further down the road if inflation does not abate soon. Following Waller's remarks, traders boosted bets for higher interest rates, with swaps markets fully pricing a quarter-point Fed hike by December for the first time.

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The Federal Open Market Committee's decision to leave its benchmark federal funds rate unchanged in a range of 3.5% to 3.75% in April prompted dissents from three policymakers who objected to the so-called "easing bias" in the post-meeting statement's language suggesting the Fed will eventually resume rate cuts. Minutes from that meeting showed a majority of Fed officials warned that the central bank would likely need to consider raising rates if inflation continued to run persistently above their 2% target.

Since the April policy decision, stronger-than-expected data on employment and faster-than-expected inflation figures have reinforced the notion that price pressures remain the bigger risk from the conflict than a sharp growth slowdown. New survey data out Friday showed that consumer sentiment slumped to a record low in May, as Americans expect prices to rise an annualized 3.9% over the next five to 10 years, up from 3.5% in April and the highest in seven months. They also saw costs advancing 4.8% over the next year.

Waller described the labor market as stabilizing, but not booming, and said he views the current level of the Fed's benchmark as having a restrictive effect on the US economy. However, he stated that the bigger driver of policy now is the inflation outlook, which hinges on the ultimate duration of the war.

Comparison of Inflation Expectations

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Waller's remarks come hours before Kevin Warsh is expected to be sworn in as the new Fed chair in a White House ceremony.