Waller leaves Fed’s September rate decision unusually open

The Federal Reserve‘s September 15-16 meeting remains unusually open after Governor Christopher Waller said his own preference could shift depending on whether August inflation showed continued progress or a reversal.

In remarks on September 3, Waller said continued movement toward the Fed’s 2% inflation goal would make him inclined to hold the federal funds rate at its current setting. But he also said a hotter August report could lead him to support a quarter-point increase.

The Bureau of Labor Statistics report released September 11 did not settle that question. Consumer prices rose 0.4% in August from July, while headline inflation was 3.4% over the 12 months through August. Core CPI, which excludes food and energy, increased 0.3% for the month and 2.4% over the year.

Why the August report points in two directions

The monthly figures left room for officials who favor tighter policy to argue that inflation pressure remains persistent. Core prices rose 0.3% in August, up from 0.2% in July, and headline inflation remained well above the Fed’s 2% goal.

Energy prices contributed materially to the headline increase. Gasoline rose 3.9% during the month, accounting for more than one-third of the monthly all-items increase, while the broader energy index rose 2.1%. Those movements can lift the overall CPI reading without necessarily showing that underlying price pressure has broadly accelerated.

At the same time, annual core inflation eased from 2.5% in July to 2.4% in August. That decline supports the argument that disinflation is continuing over a longer period, even though the latest monthly reading was firmer.

The result is mixed rather than uniformly hot or uniformly cooling. Policymakers can focus on the stronger monthly core reading and elevated headline inflation, or place greater weight on the lower annual core rate and the role of gasoline and energy in the headline increase.

CPI is not the Fed’s preferred inflation measure; policymakers focus primarily on the personal consumption expenditures price index. Still, the CPI report is an important input ahead of the meeting, particularly because Waller explicitly said August inflation would heavily influence his decision.

Waller described a reaction function, not a promise

Waller’s remarks were conditional. He said that if incoming data showed continued progress toward 2% inflation, he would be willing to support holding rates steady. If inflation came in hot and evidence showed that progress had reversed, he said he would consider a rate hike.

That distinction matters. Waller did not announce a predetermined September vote, and his view was not presented as the consensus of the Federal Open Market Committee. He was explaining how different data outcomes could lead him to advocate for different policy actions.

A policy split was already visible

The minutes of the July 28-29 FOMC meeting show that disagreement was already present before the August data arrived. Nine members supported holding the target range for the federal funds rate at 3.5% to 3.75%, while three members preferred a quarter-point increase.

The July 9-3 vote does not establish that a September majority favors a hike. It does show that the committee was not uniformly comfortable with the existing setting. The August inflation report and the public comments of officials will determine whether that disagreement widens, narrows or changes direction.

What a hold or hike could mean

A hike would signal that officials believe additional restraint is needed to prevent inflation from becoming more persistent. It would tend to keep short-term borrowing costs elevated and could push some rates on credit cards, auto loans, business credit and other variable-rate products higher, although the effect on any individual product would vary.

A hold would leave the target range unchanged while giving officials more time to assess whether the annual cooling in core inflation continues. It would not automatically make mortgages, personal loans or credit cards cheaper. Many consumer rates depend on longer-term bond yields, lender pricing, credit risk and competition as well as the Fed’s target.

Savings rates can also respond differently. A higher policy rate generally supports better returns on some deposits and money-market products, while a future move toward lower rates could reduce those yields. Financial markets may adjust before or after the decision as investors interpret the data and the Fed’s communication, but market expectations are not the same as the committee’s final vote.

What to watch on September 16

The policy statement will show how the Fed describes inflation, employment and the balance of risks. The vote count will reveal whether the disagreement seen in July has widened, narrowed or changed direction.

The September meeting is also associated with updated economic projections. Those forecasts can provide clues about officials’ expectations for inflation, growth, unemployment and future interest rates, although they are not promises of upcoming action.

The chair’s press conference will be another important signal. Readers should listen for how officials interpret the conflicting August CPI measures, whether they view the energy increase as temporary or persistent, and what evidence would support another increase, a hold or a later change.

For households and businesses, the practical message before the meeting is limited but important: the next rate decision was still pending on September 14, and the August CPI report did not settle it. The immediate policy path will depend on how officials weigh a firmer monthly core reading against a lower annual core rate, the continued distance from the 2% goal and the effect of energy prices on headline inflation.

Sources

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