Federal Reserve Governor Christopher Waller said Tuesday he favors raising interest rates in December, with a half-percentage-point increase potentially warranted if inflation exceeds expectations. Speaking in London, he argued that the central bank must deliver on the prospect of further increases communicated to financial markets to preserve its credibility.
Waller said a softer-than-expected October inflation report would not necessarily change his inclination to support a December hike. A higher-than-forecast reading, however, would strengthen the case for a larger move. In that situation, he said, policymakers should consider raising the policy rate by 50 basis points rather than 25 basis points.
His argument centered on the connection between the Fed's guidance and market expectations. Waller said communications before and during the October policy meeting had already prompted markets to anticipate additional rate increases. Failing to implement those increases, he warned, would cause investors to lower their expectations for future hikes, pushing rates down and easing monetary policy in an undesirable way.
That does not mean the Fed must increase rates at every meeting, Waller said. He distinguished between the exact schedule of policy moves and the need to carry them out within a reasonable period. Higher rates would be required "sooner rather than later," he added, emphasizing that following through matters even when increases are separated by pauses.
The Federal Open Market Committee left rates unchanged at its October meeting, saying further information would help determine the appropriate policy course for reducing inflation. Two members opposed that decision: Fed Governor Lisa Cook and Cleveland Fed President Beth Hammack. The committee's next policy meeting is scheduled for Dec. 8-9.
The Bureau of Labor Statistics was scheduled to release October consumer price index data on Tuesday. That report is among the final inflation readings due before the December meeting. Since the October decision, several Fed officials have urged patience while continuing to stress the importance of returning inflation to the central bank's 2% target.
Market expectations remained tilted toward a smaller December increase. According to CME Group's FedWatch, markets assigned a probability above 80% to a quarter-percentage-point hike, while pricing in no chance of a half-point move. On Monday, Chicago Fed President Austan Goolsbee warned that policymakers must guard against an overheating economy because reversing that condition would be painful.
Waller's assessment of the economy remained broadly positive. He described growth as proceeding "at a healthy pace" and the labor market as solid, though lacking dynamism in an environment characterized by low hiring and low firing.
