Fed's Christopher Waller backs 50 bps rate hikes at 'several' meetings

Federal Reserve Governor Christopher Waller said he wants to keep raising interest rates in half-percentage point steps until inflation is easing back toward the US central bank’s goal.

“I support tightening policy by another 50 basis points for several meetings,” he said on Monday in Frankfurt. “In particular, I am not taking 50 basis-point hikes off the table until I see inflation coming down closer to our 2% target,” he told an event hosted by the Institute for Monetary and Financial Stability.

US central bankers raised rates by a half point this month to cool the hottest inflation in 40 years and have signaled they’ll hike by the same amount again at their meetings in June and July. They’ll also start shrinking their massive balance sheet at a monthly pace of $47.5 billion from Wednesday, stepping up to $95 billion in September, in a process also called quantitative tightening.

Officials are counting on a combination of higher rates and QT to rebalance supply and demand that was pushed out of line during the pandemic. Waller said that various economic models suggest that the overall reduction in the balance sheet would be equivalent to around “a couple of 25-basis-point rate hikes,” while cautioning such estimates were very uncertain.

Data released Friday showed the Fed’s preferred gauge of price pressures, the personal consumption expenditures price index, rose by 6.3% last month from April 2021 -- more than three times the Fed’s 2% target. The data also showed US consumer spending holding up as households dip into savings.

High inflation has angered Americans and hurt Joe Biden’s approval ratings. The president will hold a rare meeting with Powell in the Oval Office on Tuesday to discuss the state of the American and global economy, according to a White House statement.

Waller, who has emerged as one of the more hawkish members at the US central bank since becoming a governor in December 2020, said that no one should doubt the Fed’s commitment to curbing price pressures.

‘Do More’

“By the end of this year, I support having the policy rate at a level above neutral,” said Waller, referring to the level of interest rates that neither speed up nor slow down the economy. “If the data suggest that inflation is stubbornly high, I am prepared to do more.” 

Officials in March projected the neutral rate to lie around 2.4%, according to the median estimate of their quarterly forecasts that will be updated in June.

Financial markets have swung violently in recent weeks as investors vex over the risk that the Fed could trigger a recession by tightening too aggressively, even as price pressures dim the outlook for corporate profits.

But talk of a September pause -- which Atlanta Fed chief Raphael Bostic suggested on May 23 “might make sense” if inflation cools -- has encouraged speculation that the Fed might not end up increasing borrowing costs as high as some had feared. 

Those hopes got a lift after minutes of the Fed’s May 3-4 meeting released last week showed most officials were open to taking a more flexible approach later this year after “expediting” the removal of their policy support.

Waller said that his own plan for rate hikes was “roughly in line” with expectations in financial markets.

“Markets expect about 2.5 percentage points of tightening this year,” he said. “This expectation represents a significant degree of policy tightening, consistent with the FOMC’s commitment to get inflation back under control and, if we need to do more, we will.”