WASHINGTON — Federal Reserve Governor Christopher Waller, a permanent voter on U.S. interest rate decisions, said on the 3rd that signs of disinflation were finally emerging and that he would support holding rates steady if data over the next two weeks confirmed the trend. His remarks followed similar caution from New York Fed President John Williams, widely seen as the Fed's effective second-in-command, a day earlier.
Speaking at an event hosted by Reuters, Waller acknowledged that inflation remains well above the Fed's 2% target but said progress has been slow yet steady. Disinflation refers to a slowdown in the pace of price increases, even as prices continue to rise.
Waller noted that the three-month average of core inflation, which excludes food and energy, stood at 3.05%, still short of the Fed's 2% goal but down steadily from 4.76% as of February. "You have to look at the trend. That's substantial improvement, and the pace of decline is encouraging," he said. In a question-and-answer session with the moderator, he added that a three-month core inflation rate of 2.8% would be an acceptable level.
With the prospect of a September rate increase and further hikes being discussed in and around the Bank of Japan, and momentum building for a Fed hold, markets expect the interest rate gap between the two countries to narrow.
Still, Waller said that if August data due on the 11th showed the recent slowdown in inflation to be temporary, raising rates at the September meeting of the Federal Open Market Committee could be appropriate. According to the CME FedWatch Tool, the probability priced into federal funds futures of a 0.25 percentage point increase in September fell to 50.5% from 63.2% a day earlier.
