Fed Governor Waller sees December hike likely, opens door to possible half-point increase

Speaking at an event in London, the policymaker outlined a firm stance on monetary policy, stating that he "is leaning toward" a rate increase in December even if the upcoming October inflation data comes in softer than expected. Furthermore, Waller indicated that he would support "more robust action" if the incoming readings come in higher than current forecasts.

"In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," Waller said during his remarks. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."

The central bank governor emphasized that Fed communications prior to and during the October meeting have already led financial markets to price in additional rate hikes. Following through on those communication signals, Waller added, is what remains critically important for maintaining public and market trust, even if the actual implementation of the hikes happens intermittently rather than consecutively.

"When this communication is clear and credible, what really matters is that those hikes are eventually carried out — it is not necessary, for example, to raise rates at consecutive meetings," he explained to the audience. "If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way."

Waller elaborated that higher borrowing costs "will be needed, sooner rather than later," highlighting the proactive stance required to keep inflationary pressures anchored. "So, while the precise timing of the hikes doesn’t matter, ensuring that the promised hikes are implemented in a reasonable period of time does," he noted.

The policy debate comes at a sensitive time for the Federal Open Market Committee (FOMC). In its recent decision to pause and pass on an October rate hike, the rate-setting committee stated that "the accumulation of more information" will help guide the proper policy path necessary to successfully bring down inflation toward the central bank’s stated 2% target. However, that decision to hold rates steady was not unanimous. Governor Lisa Cook and Cleveland Fed President Beth Hammack both dissented from the majority, signaling internal debate among policymakers over the immediate trajectory of monetary policy.

Adding to the urgency of the upcoming policy deliberations, the Bureau of Labor Statistics is scheduled to release the October reading on the consumer price index (CPI) on Tuesday. This report serves as one of the final major inflation updates before the central bank convenes for its next scheduled policy meeting on December 8-9.

Since the October policy decision, multiple Federal Reserve officials have continued to counsel patience while simultaneously emphasizing the unwavering need to bring inflation back down to the central bank’s 2% target. Despite Waller’s assertive commentary regarding a potential larger move, broader financial markets are currently pricing in a better than 80% chance of a standard December quarter-point hike, while assigning virtually no probability to a half-percentage-point increase, according to CME Group’s FedWatch tool.

The broader economic backdrop remains a central theme in these policy discussions. Chicago Fed President Austan Goolsbee warned on Monday that the central bank has to exercise extreme caution to ensure the economy does not run too hot. "Because once it gets overheated, it’s extremely painful to get rid of that kind of overheating," Goolsbee remarked, underscoring the delicate balancing act facing monetary policymakers.

In his own remarks in London, Waller characterized the broader U.S. economy as growing "at a healthy pace" overall. He noted that the labor market has also maintained a solid footing, even if it is not exhibiting hyper-dynamic growth within the current environment characterized by low hiring and low firing rates. As policymakers digest the incoming economic indicators and prepare for the release of the latest consumer price index data, Waller’s comments lay down a distinct marker for the internal debates that will shape the Federal Reserve’s final decisions heading into the final month of the year.