- Key insight: A top official on the Federal Open Market Committee said he will be ready to support rate hikes in the "near term" if inflation measures continue to rise.
- Expert quote: "When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation. Sternly staring at inflation until it melts before our withering gaze is not an option." — Federal Reserve Gov. Christopher Waller.
- Forward look: The first reading of consumer price inflation from June will be released on Tuesday morning. Its findings will set the stage for the Fed's next policy decision at the end of the month.
NEW YORK — Inflation could soon force the Federal Reserve to raise interest rates, according to one of the central bank's
Fed Gov. Christopher Waller noted that the Fed's preferred measure of inflation was nearly double the central bank's target in May. And while a surge in oil prices contributed to that high reading, he noted that the core goods and services prices have been rising steadily for months.
"Because core inflation is a good guide to future inflation, I am concerned that, if this upward trend continues, it will be hard to push inflation back toward the [Federal Open Market Committee's] 2% goal with monetary policy at its current setting," Waller said.
He added that he is loath to see the Fed repeat its mistake from the pandemic era, when it dismissed rising prices as a "transitory" phenomenon that would correct itself without monetary policy intervention.
"I am cognizant of the mistake we made in 2021 by not responding sooner to the high inflation we observed, and I am determined to avoid repeating it," he said.
Last month the Bureau of Labor Statistics's personal consumption expenditure index, the Fed's preferred measure of inflation, showed a
During his remarks, delivered in front of the New York Association for Business Economics, Waller said he will parse two inflation reports this week — the BLS'
"So, the question is, will core inflation continue on its upward trajectory, or has it reached a turning point where it will begin to decline back toward our 2% target?" Waller said. "The direction it takes has very different implications for the path of monetary policy."
On the labor side of the Fed's dual policy mandate — full employment and stable prices — Waller said he sees a balanced market that is neither driving up prices nor holding back economic output. He said he is unconcerned about last month's weaker-than-expected BLS jobs report, which estimated that the economy added
Even with the revisions, Waller noted that the economy has added an average of more than 100,000 jobs monthly this year — a big jump from 2025's monthly average of less than 10,000.
"This is a significant improvement, especially considering how much slower labor supply growth has lowered the threshold for how many new jobs constitute a healthy, balanced labor market," he said. "By these standards, a pace of 111,000 jobs a month reflects a strong level of labor demand relative to supply."
Yet, the balance of the job market also presents challenges for the Fed. Should the FOMC decide to raise interest rates to tamp down on inflation, Waller said, it would face a greater risk of harming the job market in doing so. He noted that when the Fed began increasing the target range of the federal funds rate in 2022, there were roughly two job openings for every one job seeker, enabling the Fed to curb employment demand without leading to job losses.
"While the main effect of higher rates then was to reduce vacancies rather than employment, there is a much greater risk now that tighter monetary policy could drive up unemployment and even risk a recession," Waller said, adding that slower wage growth in recent months also indicates more slack in the labor market.
Another factor that could help the Fed stave off an immediate rate hike should inflation continue moving up is the fact that expectations for long-term inflation remain tethered to the Fed's 2% target. He pointed to activity in the Treasury inflation-protected securities markets that have priced in two-year and five-year inflation at 2.1% and 2.3%, respectively.
Still, Waller said, strong expectations alone do not justify the Fed standing idly by as inflation continues to gain traction.
"When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation," he said. "Sternly staring at inflation until it melts before our withering gaze is not an option."
