US Economic Perspectives: Waller: rates may need to be higher

Research evidence excerpt

US Economic Perspectives: Waller: rates may need to be higher

cated he would like to

raise rates soon too.

"Tomorrow we will receive consumer price index inflation for June—and producer prices

the day after—which together will give us a good estimate of PCE inflation, the measure

the FOMC targets. I would be very pleased to see a lower reading on core inflation, but

after its escalation over the first half of this year, I will need to see several months of

lower readings to feel that inflation is moving in the right direction. For the reasons I

have laid out today, I think that is still a reasonable outcome, and I would then continue

to hold the policy rate at its current target range.

But I don't take the inflationary signals I have discussed today lightly. If we get another

hot reading on core inflation this week, then the FOMC will need to consider tightening

monetary policy in the near term. As always, we need to avoid making the mistake of

fighting the last war and reacting too soon to tighten inflation, merely because we

waited too long last time. But we also must avoid repeating the same mistake we made

in 2021 and 2022 by waiting too long to respond. In conclusion, we are at a crossroads

for policy, and the appropriate action will depend on incoming data."

The speech had a fair amount of detail, but the primary points he made were that the

initial conditions today are different than in 2021-2022 and the labor market is not as

strong now, nor as inflationary, just "stable." That raises the risks to the expansion from

raising rates. However, with the labor market stable and near estimates of full

employment, there are important reasons to be vigilant about inflation, even though

inflation expectations look anchored in his view. Policy should react to above target