“Sternly staring at inflation until it melts before our withering gaze is not an option,” he said with a sense of urgency.
By Wolf Richter for WOLF STREET.
Fed Governor Christopher Waller is getting nervous about inflation and doesn’t want the Fed to make the 2021 mistake again of waiting too long before hiking policy interest rates, and if the core components of the CPI report on Tuesday and the PPI report on Wednesday are “hot” again, “then the FOMC will need to consider tightening monetary policy in the near term,” he concluded his speech today.
Does “in the near term” mean the FOMC meeting later this month? Or the FOMC meeting in September? The calculus had been for rate hikes to start later this year. Now the July meeting is on the front burner? If CPI and PPI readings are hot this week, will there be a majority of voting members at the July meeting to vote for a rate hike?
“Inflation and monetary policy are at a crossroads,” he said in the speech.
“Sternly staring at inflation until it melts before our withering gaze is not an option,” he said with a sense of urgency.
He explained: “There are some crucial differences now compared with 2021, and there is still a credible case for inflation to begin to fall back to our 2 percent goal with policy at its current setting. But I am concerned about the equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.”
Again, “in the near term.” What the heck does that mean? Does that mean he knows there’s a potential majority of voting FOMC members for a rate hike at the July meeting?
So now he has joined the chorus of FOMC members that see inflation as a bigger and growing risk and that are getting increasingly edgy about it, while the labor market is now “near full employment and stable,” as Waller said, and has recovered from the weakness last year, and has moved down in the rankings on the Fed’s worry list.
“When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation,” he said.
And he cited the inflation data and what was behind the acceleration.
Inflation, as measured by the year-over-year increase of the all-items PCE price index (red line in the chart below) which the Fed uses as yardstick for its 2% inflation target, reached 4.1% in May, more than double the Fed’s target. It has been above target since March 2021.
Without the energy price spike, inflation as measured by the “core” PCE price index, which excludes energy components and foods, rose to 3.4% (blue line). It has also been accelerating since May last year.
The “core services” PCE Price index bottomed out at a too-high level late last year and started accelerating again this year and reached 3.7% (yellow). Core services dominate consumer spending.
An inflation hawk would have clamored for rate hikes starting last fall – when the Fed began to cut rates. But there are no inflation hawks left on the FOMC.
“So, the question is, will core inflation continue on its upward trajectory, or has it reached a turning point where it will begin to decline back toward our 2 percent target? The direction it takes has very different implications for the path of monetary policy,” he said.
“I am committed to returning inflation to the FOMC’s 2 percent goal but also determined to avoid overtightening policy and risking a recession,” he said.
While he expects the all-items inflation indexes to decelerate, as the price of gasoline has started to decline from the spike, he “will be focused on core inflation, and on that count, there are recent signs of continued pressure on goods prices,” he said.
“Core intermediate goods prices tracked in the producer price index [PPI], which may feed through to PCE prices, have increased noticeably in recent months. Also, purchasing managers for manufacturing businesses reported in June that their input prices have continued to increase, the 21st straight month they said so,” he said.
“Overall, I am monitoring price movements and am alert to the risk that the increase in core inflation is a sign that inflationary pressures are spreading through the economy,” he said.
“The FOMC has to be ready to tighten monetary policy to prevent a repeat of the 2021-to-2022 inflation episode. But there are two differences between now and then that make me cautious about leaning too heavily on that experience to make this decision,” he said.
So Waller returns to his roots as a well-reasoned centrist on inflation, after his sojourn in the dove-camp: At the FOMC meeting on July 30 last year, he’d dissented from the FOMC vote that kept rates unchanged because he’d wanted a rate cut; and he dissented again at the January 2026 meeting, when the FOMC kept rates unchanged after three cuts at the prior meetings, and he still wanted another rate cut; and during that entire time in dove-camp, he wanted to be Fed chair.
Treasury yields rose across the board today.
The 1-year Treasury yield rose by 6 basis points to 4.12% today, the highest since June 2025. It is now 50 basis points above the Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its policy rates. The 1-year yield is pricing in the beginning of a rate-hike cycle:
The 10-year Treasury yield rose by 6 basis points to 4.62%:
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This could be the trigger.
Hold on. It’s going to be a wild ride!
I’ll believe it when I see it.
Warsh will be Paul Volcker II.
He will overtighten.
Wishful thinking. Even if he wanted to — and he doesn’t want to — he would still have to build a majority at the FOMC, he would have find at least six other voting FOMC members to go along with his plans. And that’s not going to happen. They’ll tighten a little bit. Probably not enough to get rid of inflation, and then everyone will get used to higher inflation and higher interest rates and move on.
Yep, Warsh will definitely trigger a recession.
Destruction of employment opportunities for the poor and asset values for the rich.
Everyone will Warsh in 2 years.
LOL, if there is a recession big enough for “destruction of employment opportunities,” then asset values are going to tank too.
I recently watched a YouTube video of one of Powell’s previous meetings with the US Senate. One Senator fawned over Powell’s engineering of a “soft landing” for the US economy.
Which reminded me of a previous observation. Politicians are terrified of having their name/tenure in office associated with a recession. They’re aware that many voters (wrongly) believe a strong correlation between economic conditions and their elected representatives. Many people “vote with their pocketbook” even though their representatives may have had little (or nothing) to do with the policies that led to current economic conditions.
Predictably, this Senator made no mention of the negative effects of Powell’s policies during Covid and afterwards. Just one example: young people being effectively priced out of the real estate market. That topic did not come up. Imagine that.
I continue to believe that Powell fully expected a large-scale recession as a result of the tightening period during his time in office. And he further thought that recession would “bail out” the substantial real estate price increases (along with many other prices) that came from the emergency ZIRP policy of 2020 – 2022. I believe he realized those price increases (inflation) would happen but expected the subsequent recession to ease and/or nullify the inflationary effects. And there is a chance he would have been right.
However, when that recession failed to materialize Powell was caught between the devil and the deep blue sea. Is it better to continue raising rates or wait until the past increases take full effect? That is where he lost his way IMHO. He should have continued increasing rates instead of the “wait and see” approach.
Easier said than done, I know. In the interim, Federal Reserve members are constantly under pressure to reduce rates from elected officials, despite the Fed’s independence. Warsh will experience the same pressure. Will he be more aggressive than Powell, or will he take the smaller tightening measures that Wolf mentioned? Probably the latter. Which, in my opinion, is not good.
Great read. The Fed’s momentum has shifted to a tightening bias, and Warsh will use that momentum to tighten 25 bps in ‘25 & 25 bps in ‘26.
If the markets are pushing up rates, as they have been since the Fed started cutting, how is raising the fed rate going to make any difference? Consumer rates tied to the 10 year are already way up. And one of the biggest drivers of consumer rates is indirectly tied to out of control federal spending which the Fed can do nothing about other than create a bigger debt by requiring even more interest to go to the debt. I don’t see how they have much impact with their cuts and raises.
I think quarter point rate changes matter to the largest debtor on the planet, which has $36T of rapidly growing debt.
It seems to me that the rest of the committee has yet to buy into Chairman Warsh’s views of shutting up. I fear they love the sound of their own voices too much. it would be far better if they never said anything and allowed the market to price its assumptions, then act on the information in which they are confident. remember, one of the task forces is all about the data, which we all know has been substandard, at the very least.
I think they’re trying to walk the line between shutting up and not shocking the market. I would suspect this is a coordinated strategy to get the market ready for an increase.
Why commit to buy current rates when you’ll be locked into below market rates later…thats the thinking…so to sell their debt our government (all of us) have to pay buyers more…and more…
Raise the dam rates already and get on with it.
But they have avoided 102 of the last zero recessions with all of their “mistakes” so they feel justified.
I thought recessions were a required part of a healthy business cycle.
Where is it in the Fed mandate that their job is to avoid recessions? That opens so many cans of worms chiefly malinvestment and mark to fantasy accounting.
It’s a similar playbook as the late 90’s. All we need now is a flood of Asian money like the Asian Financial Crisis (half joking). So only question is can Warsh convince market there will only be a couple hikes? They did in the late 90’s. Then they cut a little, then they popped the bubble with a hiking regime. And when Jerome threatened a couple hikes in a senate hearing in 23′ markets quickly priced those in with a near 7% drop in one week. Obviously the market then went full melt up mode higher. So unless Warsh comes out and announces a hiking cycle I would think this price action is transient and could extend the bubble even more. Even spooz price action this summer looks like 96/97/98…. Anyone know if they dug out the actual binders for how to trade this. They must be dusty as heck.
The federal government spending money like they get it from the Monopoly game can only pressure higher rates to bring in the cash. Link that with the declining faith in the leadership coming out of Washington and you have a potential for real challenges in the near future.
“But we also must avoid repeating the same mistake we made in 2021 and 2022 by waiting too long to respond.”
Perhaps he can elaborate on the cut right before the 2025 election….I mean, since they’re independent and all that and he’s now big on mea culpas. It seems to me that went a log way in defeating any realistic chance of hitting their 2% target.
Avoiding the same mistakes? I think Wall Street is fully invested in them not only repeating those mistakes, but doing so on a much greater scale.
Would love your thoughts on how the AI company bond rush might be affecting the Fed members’ thinking on inflation.
WSJ story yesterday, “The Quarter-Trillion-Dollar Onslaught of AI Bonds Is Testing Investors’ Limits”
For example, if AI infrastucture spending is a key driver of inflation, and the AI companies are price insensitive on debt, would that require higher rate hikes to have an impact on inflation?
From the story: “Typically, companies try to keep investors happy to ensure that their borrowing costs are as low as possible. But the hyperscalers are in such a heated race for computing power that they appear prepared to issue tens of billions of dollars of bonds at any moment, regardless of market conditions and whether they might need to pay higher interest rates.”
If the longer term rates keep increasing, does the fed even have a choice?
It just seems like they are so far behind the curve with such a low rate bias that they will only make a piddly 25bps adjustment when they have no better option. Is fiscal reality creeping into the room?
Funny take in the lamestream media. I saw a couple articles twisting his comments into the idea he was not ready to raise rates just because inflation was up. Even after quoting some of his statements. Didn’t even read as a reasonable take, but their spin was “hold on, even with these numbers Waller is not ready to raise rates anytime soon”. Thanks for the factual reporting Wolf.
It wouldn’t make a dent in inflation if they hike. You think the greedy f**king landlords are going to lower rents? You think insurance companies will lower premiums? You think electricity prices will go down? You think an 8 pack of Dial soap that was $3.99 ten years ago and is now $9.99 is going to get cheaper? They want inflation. Inflation increases corporate revenues. State and local governments love inflation. It now costs $100 to buy the same groceries that cost $50 in 2016, so they collect double the sales tax now. Then the politicians give themselves raises because of inflation. I think you should get 6% on a CD now, but I don’t think it’s happening anytime soon.
A recession would lower prices in some areas. In a recession people get the smaller apartment or roommates, the get the generic instead of the name brand. As a result companies and landlords have start competing on price. I doubt we’ll get broadbased deflation but if supply were to exceed demand we’d see some in things like rent, used cars, premium products would have more frequent sales, etc
The inflation is as much a product of the consumer being willing to pay whatever as it of the feds rate policy.
“You think the greedy f**king landlords are going to lower rents”
Yes, lots of landlords have already lowered their asking rents because their units are vacant and they need to fill them. Lots of big landlords went bankrupt and lost their properties to the lenders. We covered some of this here.
“You think insurance companies will lower premiums?”
Sometimes. For example, our auto insurance premium actually went down a little last year.
“You think electricity prices will go down?”
For households? Generally not. They’re regulated and ratchet higher. But wholesale electricity prices can go to zero.
“You think an 8 pack of Dial soap that was $3.99 ten years ago and is now $9.99 is going to get cheaper?”
Quit buying Dial soap.
“It now costs $100 to buy the same groceries that cost $50 in 2016,”
That’s 100% food inflation in 10 years. That’s nonsense, unless you primarily live off beef and coffee. That’s why I post data so I don’t have to listen to this BS.
Sure they want inflation. That’s the explicit policy. Did you just wake up? Their official target is 2% PCE inflation year-over-year. And they’ll gladly accept 3% year-over-year but 4% seems to be a bit too high.
Curious to know whether you think commercial real estate rents for new buildings will decline? My meager understanding is that commercial new building loans are predicated on a certain level of rent revenue.
Here in Silicon Valley there is an explosion of empty buildings, but also plenty of new commercial construction. There have been a threat by a Russian oligarch’s progeny to build a massive skyscraper down the block from me in Menlo Park based on Proposition 9 laws (giving builders near automatic approval as long as they build a sufficient amount of residential apartments/homes, aka “builder’s remedy” for the housing shortage).
You have to negotiate with the landlord. In San Francisco, per-sf asking rents have declined. But the thing that landlords will do readily is agree to certain number of months of free rent. And they will agree to big tenant improvement allowances. That can be a big chunk of money for office space. And none of it shows up in the asking rent figures.
how about devaluing the currency by 20% that will raise the rates on long term bonds and help with the deficit i thing thats the govts end game
Israel devalued 99.90 % in 1986.
The effect of a greater devaluation would be even more than the devaluation that you propose.
That’s BS on two levels: 1. it devalued the currency by 20% after several years of near-hyperinflation and replaced it with the New Israeli Shekel; and 2. that was in 1985, and 1986 was a pretty good year after the 1985 Economic Stabilization Plan.
Vanguard Federal Money Market Fund paid out 3.57% distributions for month of June($4800/mo.) Vanguard latest stock market total returns projections are estimated at 4% to 5% over next 10 years. It would be great to see the Fed Funds rate increased to reward all the foxhole savers who are just trying to survive.
I love Vanguard but their projections have been really inaccurate. See their projections from 2016/2018.
The 3 month to 1 Year Treasury Bills are already between 4.05% to 4.25%. The work is already being accomplished in the Treasury market.
These clowns are so far behind the curve it’s laughable. Same sh!t, different day. These a$$holes are the worst human beings imaginable, just financially nuking the working class and the poor.
Agree. Lot of Ifs and Buts by Waller.
I am glad Waller has changed his tune now in terms of Inflation is real risk now and needs more focus. He was leading Doves since Jan 2025.
Wall St cry babies argument is 25 BP hike is not going to bring down inflation. Sure! but it will be clear message telling Markets FED is serious about Inflation. Otherwise its just Empty talks. Markets needs to see the Message in Action not just in talks.