Federal Reserve Governor Christopher Waller said the central bank should still raise interest rates at its December 8-9 meeting, even if October inflation data shows a cooling. Speaking in London ahead of the release of the October consumer price index (CPI) report, Waller said "further policy tightening will be needed," following what he called a "bad" September inflation reading.
Waller's baseline is a quarter-point increase in December, but he added that a half-point hike "should be considered" if core CPI rises 0.3% or more month-on-month. That would be above the 0.2% consensus among economists surveyed by Reuters. Core CPI excludes volatile food and energy prices and is closely watched by the Fed as a gauge of underlying inflation pressures.
Why this matters for the Fed's path
The Fed has been raising rates aggressively over the past year to combat inflation that has run at multi-decade highs. The federal funds rate currently sits in a range of 3.75% to 4.00%, after a series of increases that began in early 2022. Waller's comments suggest that even if October's headline inflation number is softer, the Fed is not ready to pause its tightening campaign.
Waller's remarks are notable because he is seen as a centrist on the Federal Open Market Committee (FOMC), the group that sets monetary policy. His willingness to keep a half-point hike on the table signals that the committee is still open to aggressive action if inflation proves sticky. The Fed has already delivered three consecutive 75-basis-point hikes, but Waller's comments suggest a possible shift to a smaller increment, depending on the data.
The October CPI report, due out later this week, will be a key input for the December decision. If core inflation comes in at 0.3% or higher, Waller said a half-point move should be considered. If it comes in lower, a quarter-point move is more likely. This data-dependent approach is typical of the Fed, which has repeatedly stressed that its decisions will be guided by incoming economic data.
What it means for investors
For everyday investors, the Fed's rate decisions have a direct impact on borrowing costs, savings yields, and stock market performance. Higher interest rates tend to make borrowing more expensive for consumers and businesses, which can slow economic growth. They also make bonds and savings accounts more attractive relative to stocks, which can put downward pressure on equity prices.
Waller's comments suggest that the Fed is still in tightening mode, which means investors should expect continued volatility in markets as they adjust to the prospect of higher-for-longer rates. The dollar has been steady as traders await the inflation data, but a hot CPI reading could strengthen the dollar further, which can weigh on multinational companies' earnings.
For those with savings accounts or certificates of deposit, higher rates are generally positive, as banks tend to pass on some of the increase to depositors. However, for those with variable-rate debt, such as credit cards or adjustable-rate mortgages, the cost of borrowing will likely rise further.
The Fed's path is also being watched globally. Central banks around the world are facing similar inflation pressures, and many are also tightening policy. For instance, Norway's core inflation has cooled, which may ease pressure on its central bank, but the overall global trend remains toward higher rates.
What to watch next
The immediate focus is on the October CPI report, which will be released later this week. If core inflation comes in at 0.3% or higher, Waller's comments suggest a half-point hike is on the table. If it comes in lower, a quarter-point move is more likely. The Fed's next meeting is scheduled for December 8-9, and the decision will be closely scrutinized by markets.
Beyond the December meeting, investors will be watching for any signals about the pace of future hikes. The Fed has indicated that it may slow the pace of increases, but it has also stressed that the ultimate level of rates will depend on inflation. Waller's remarks reinforce the message that the Fed is committed to bringing inflation down, even if it means more pain for the economy.
For now, the key takeaway for investors is to expect continued uncertainty and to stay diversified. Rate decisions are never certain, and the data can shift quickly. As always, it's important to focus on long-term goals rather than short-term market moves.
