Fed’s Waller Says You Don’t Want to Overdo Rate Hikes Giving Bonds Some Relief

Federal Reserve Governor Christopher Waller speaking after back-to-back red hot inflation data said on Thursday, “with the C.P.I. data in hand, I support another 75-basis point increase” at the July FOMC. He added for him a 75 bps hike in July gets us to neutral which he sees as 2-2.25%. He added that you don’t want to overdo rate hikes. Market responded to the hawk in the bond and currency markets. The dollar came off the rampant surge and US 2-year yields flipped to down 1 bps from up 12 bps prior to the speech. Significantly the 100 bps hike odds are now 37% from +80% earlier today.

Fed Gov Waller

Today US Producer price inflation for June continued elevated at a rapid pace +11.3% y/y vs +10.7% expected, Prior was +10.8% y/y. Yesterday US consumer inflation hit +9.1% y/y vs +8.6% expected. If retail sales and housing data come in “materially stronger than expected”, he said he would lean towards a larger July rate hike. In June CPI prices for energy jumped 41.6% from a year earlier, the most since April of 1980 and food prices jumped 10.4%, the largest 12-month increase since February of 1981. 

“We have important data releases on retail sales and housing coming in before the July meeting,” suggesting that he could still support an even larger move depending on how conditions evolve.

“If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting,” he said, “to the extent it shows demand is not slowing down fast enough to get inflation down.”

Waller at an event in Victor, Idaho

Hawk Fed’s Waller Speech Highlights

Waller talking at an event in Victor, Idaho

  • I support another 75 bps in July. If retail sales and housing data come in “materially stronger than expected”, I would lean towards a larger July rate hike
  • For me, a 75 bps hike in July gets us to neutral
  • For me, neutral is 2-2.25%
  • You don’t want to overdo rate hikes
  • The market is “getting ahead of itself.”
  • I expect hikes to continue after July at a pace that’s dependent on incoming data
  • After July, further increases will be restricting demand
  • I expect policy to be restrictive until there has been a sustained reduction in core PCE inflation
  • A soft landing is ‘very plausible’ based on strong labor market
  • Fed must be ‘utterly focused’ on inflation fight
  • Very strong labor force data does not show weakening
  • June inflation report a ‘major league disappointment’
  • I think it is plausible that growth goes below the longer-run average but doesn’t go negative
  • A large amount of excess savings still in US bank accounts
  • It’s inconceivable to have a recession with unemployment rate at 3.6%

The retail sales report is due out tomorrow and the consensus is for a 0.8% increase to headline and a 0.3% increase to the all-important control group.

About Christopher J. Waller

Christopher J. Waller took office as a member of the Board of Governors of the Federal Reserve System on December 18, 2020, to fill an unexpired term ending January 31, 2030.

Prior to his appointment at the Board, Dr. Waller served as executive vice president and director of research at the Federal Reserve Bank of St. Louis since 2009.

In addition to his experience in the Federal Reserve System, Dr. Waller served as a professor and the Gilbert F. Schaefer Chair of Economics at the University of Notre Dame. He was also a research fellow with Notre Dame’s Kellogg Institute for International Studies. From 1998 to 2003, Dr. Waller was a professor and the Carol Martin Gatton Chair of Macroeconomics and Monetary Economics at the University of Kentucky. During that time, he was also a research fellow at the Center for European Integration Studies at the University of Bonn. From 1992 to 1994, he served as the director of graduate studies at Indiana University’s Department of Economics, where he also served as associate professor and an assistant professor.

Dr. Waller received a BS in economics from Bemidji State University and an MA and PhD from Washington State University.

Committee on Federal Reserve Bank Affairs

Governor Brainard, Chair and Oversight Governor for RBOPS
Governor Bowman, Member
Governor Waller, Member

Source: Federal Reserve

From The TradersCommunity US News Desk