Fed’s Waller pivots on interest-rate bet as worried consumers sound inflation alarms

Federal Reserve Governor Christopher J. Waller says persistent price pressures and shifting economic risks forced his pivot toward monetary policy. The surprising transition was underscored by fresh Fed data showing consumer confidence slipping and household inflation expectations climbing.

Waller, in remarks prepared for the Istanbul Economic Forum on Oct. 8, pointed to the Federal Open Market Committee’s September decision to raise the benchmark interest rate by a quarter point to a range of 3.75% to 4%. The hike ended a nine-month pause and reversed a sequence of late-2025 rate cuts designed to cushion a softening labor market.

A confluence of pressures, including stubborn energy costs tied to the Iran war, rising tech prices driven by the AI buildout, and looming trade tariffs, have stalled progress toward the Fed’s 2% inflation target, according to Waller.

The elevated August CPI inflation reading finalized the shift, he said. “I am concerned that the recent acceleration in inflation… will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation.’’

That same anxiety is mirrored in the New York Fed’s September Survey of Consumer Expectations released Oct. 7. The monthly survey showed the median one-year-ahead inflation expectation jumping 0.3% to 3.9%, the highest level in three years.

Meanwhile, three-year expectations ticked up 3.3%, and consumer perceptions and expectations regarding their personal financial situations deteriorated.

Waller said that while labor-market stability gives the U.S. central bank room to maneuver, he and his fellow policymakers are prepared to enact further tightening if price pressures fail to abate.

“With evidence that economic activity is strengthening in the second half of this year, I am not greatly concerned that tighter monetary policy threatens a damaging slowdown in the economy,” Waller said.

“But I am concerned that the recent acceleration in inflation — after what soon will be five and half years of it above the FOMC’s target — will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation,” he said.

Looming CPI report expected to come in hot

The next CPI inflation report is slated to be released Oct. 14. 

As of Oct. 10, the consensus outlook for the CPI is for headline inflation to accelerate, largely because of higher energy prices, with underlying inflation remaining relatively contained.

For investors, the critical question is whether that report gives the Fed another reason to hike rates after its September increase.

More Fed:

• J.P. Morgan sees Fed rate hikes going out with a bang this year
• October Fed rate hike hinges on two looming economic reports

Most Fed officials filed “dot plot” projections at the September meeting showing one more rate increase across the Fed’s two remaining FOMC meetings in 2026. A small handful penciled in increases at both meetings.

But the minutes of the September meeting, released Oct. 7, didn’t reflect a clear plan to hike rates at its Oct. 27-28 FOMC meeting. This syncs with recent comments from key policymakers, including New York Fed President John William, who have suggested an additional hike could wait until the Dec. 8-9 meeting.

“Most participants assessed that another increase in the target range for the federal-funds rate would likely be appropriate by year end,” the minutes said. “Participants emphasized, however, that they approached each meeting with an open mind and decisions at future meetings would depend on incoming information.”

Traders expect a hold at October FOMC meeting

According to the CME Group FedWatch Tool on Oct. 10, traders overwhelmingly expect a 81.6% probability that the FOMC will hold rates steady at the October meeting and an 83% chance of a rate increase at the December meeting. 

The unanimous Sept. 16 12-0 FOMC decision to make a quarter-point hike lifted the Fed’s benchmark Federal Funds Rate to a range of 3.75% to 4% and was widely expected by traders and Fed watchers.

It marked a renewed hawkish push to tighten monetary policy following persistent price pressures fueled, as I reported, by rising energy costs from the Iran war and related economic and geopolitical shocks.

The big surprise was the “dot plot” signal” that another rate hike could be coming before the end of the year and potentially more if stubborn inflation from energy shocks and the Iran war geopolitical uncertainties don’t ease.

“My decision to change the stance of policy emerged over time because it is not one that I take lightly,’’ Waller said. “With evidence that economic activity is strengthening in the second half of this year, I am not greatly concerned that tighter monetary policy threatens a damaging slowdown in the economy.’’  

Related: J.P. Morgan sees Fed rate hikes going out with a bang this year