Fed Governor Waller: Open to a "bigger" rate hike this month than in June

Federal Reserve Governor Christopher Waller said at an event at the Global Interdependence Center in Idaho on Thursday that he supports the central bank raising its benchmark interest rate by 75 basis points this month but is willing to consider the most aggressive rate hike in decades and is open to a "bigger" increase than in June.

After misjudging the direction of the economy late last year, Fed officials have actively shifted to fighting inflation to counter the impact of massive money printing. They had expected that as vaccination levels increased and schools reopened, the labor supply would recover, thereby reducing wage costs, and price increases for many goods would be temporary.

However, the inflation data was shocking. The US Consumer Price Index (CPI) rose 9.1% year-on-year in June, higher than market expectations and the largest increase since 1981.

The Federal Open Market Committee (FOMC), which is responsible for regulating monetary policy, approved a 75 basis point move in June, the largest monthly increase since 1994.

Traders are predicting a 100 basis point increase in the Federal Reserve's benchmark interest rate following new CPI data on Wednesday.

Waller specifically mentioned retail sales and housing as two key indicators, saying: "The fundamental picture for July depends on the data we will see soon. We will release important data on retail sales and housing before the July meeting. If the data is materially stronger than expected, it would make me inclined to raise interest rates more sharply at the July meeting because it would suggest that the slowdown in demand is not fast enough to reduce inflation."

According to CME data, as of the morning of July 14, Eastern Time, the market priced in a 100 basis point probability of nearly 80%. Although Waller is open to a larger rate hike, he said that the market pricing is "a little bit beyond his expectations."

Retail sales data will be released on Friday, with spending expected to rise 0.9% in June, while the CPI is expected to rise 1.1%. These figures are not adjusted for inflation.

“If I see data over the next two weeks that shows demand is still very strong and robust, then I would lean toward a higher rate hike,” Waller said.

If the Fed raises rates by 100 basis points, it would be the biggest one-month increase since the early 1980s, when the central bank was trying to control runaway inflation.

Waller believes that reducing inflation is the Fed's top priority now, even if more rate hikes are coming after this month. "I think we need to act quickly and decisively to get inflation down persistently and then consider the need to tighten policy further to achieve our dual mandate," he said.

While he expressed strong concerns about inflation, Waller was more optimistic about the economy.

There are growing concerns that the U.S. is heading for or already in a recession, but Waller said the strength of the job market makes him "confident that the U.S. economy will not enter a recession in the first half of 2022 and that the economic expansion will continue."

Waller's comments come after Atlanta Fed President Raphael Bostic told reporters on Wednesday that "everything" is possible after inflation data came in higher than expected. Cleveland Fed President Loretta Mester said in an interview with Bloomberg that there is no reason to raise rates by less than 75 basis points in July. As for whether to raise rates by 100 basis points, Mester said she could not make a decision for the time being.