Waller urges Fed patience on rates as inflation risks persist

Federal Reserve Governor Christopher Waller said Monday that the central bank should not rush to lift interest rates before it has more evidence on inflation, even as he warned that tighter policy could still be needed if price pressures persist. His remarks, prepared for a speech in New York, came one day before a closely watched June consumer price index report.

Waller said inflation remains above the Fed’s 2% objective and has broadened beyond the factors most often cited earlier in the cycle. He identified tariffs introduced in 2025, higher energy prices tied to fighting in the Middle East and demand spillovers linked to artificial intelligence as contributors to the current inflation picture.

The Fed official framed the policy choice as a balance between two risks: repeating the delayed response to inflation in 2021 and 2022, or tightening too quickly because officials are focused on that earlier error. Waller said he was aware of the central bank’s prior mistake in responding late to high inflation, but argued that does not mean policymakers should automatically raise rates now.

“The desire to avoid past mistakes is often the author of new ones,” Waller said, according to his prepared remarks.

Higher policy rates are the Fed’s main tool for restraining inflation. By lifting the target range for short-term rates, the central bank can make credit more expensive, slow demand and reduce pressure on prices. Waller’s comments suggest he wants evidence on whether the latest inflation forces are likely to fade or require that kind of additional restraint.

He said there remains a credible argument that inflation will start to move lower. He also said an equally plausible outcome is that inflation remains high or rises, a scenario that would call for tighter monetary policy in the near term.

Waller pointed to two conditions that, in his view, give the Fed more room than it had during the earlier inflation surge. He said the labor market is stronger and is not a meaningful source of inflation, and he said inflation expectations remain well anchored, at least by market-based measures.

He cautioned against treating anchored expectations as a reason for inaction. Waller said the view that central bankers need not respond to above-target inflation because expectations are stable is wrong, adding that policymakers cannot expect inflation to fall through observation alone.

The Bureau of Labor Statistics is scheduled to release the June CPI data on Tuesday. Economists surveyed by Dow Jones expect the all-items index to fall 0.2% on the month, reflecting a sharp drop in oil prices, while core CPI, which excludes food and energy, is expected to rise 0.2%.

On a year-over-year basis, the Dow Jones survey implies headline inflation would slow to 3.8% from 4.2% in May. Core inflation would ease to 2.8% from 2.9%.

Waller said he would welcome a softer core reading, but added that he would need several months of lower figures after the rise seen in the first half of the year before concluding that inflation was moving in the right direction. If that occurs, he said, he would continue to hold the policy rate at its current target range.

The Fed’s next policy meeting is set for late July. Markets were assigning about a 39% probability to a rate increase, according to CME Group data cited by CNBC.

This story draws on original reporting from CNBC.