Fed's Waller opens door to rate hike, citing 3.8% inflation

A key architect of the Federal Reserve's dovish policy has reversed course, opening the door to a potential interest rate hike as inflation proves more persistent than anticipated.

Federal Reserve Governor Christopher Waller said on Friday the central bank should remove its "easing bias" in light of persistent inflation, a significant reversal that pushes the odds of a rate hike firmly onto the table. The comments from the influential policymaker, delivered at a conference in Frankfurt, shift market expectations toward a more aggressive Fed stance, with traders now pricing in a two-in-three chance of a rate increase by October. The Fed's current policy rate stands at 3.5% to 3.75%.

"Inflation is not headed in the right direction," Waller said in his prepared remarks, citing recent data showing the Fed's preferred inflation measure hit 3.8% in April. "I would support removing the “easing bias” language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase."

Waller's pivot is a direct response to broadening price pressures and a surprisingly resilient labor market, which he said is no longer a dominant reason to pursue lower rates. Before his remarks, markets were pricing an initial rate hike by December; they now reflect nearly even odds of a hike as early as September, according to pricing in contracts tied to the Fed's policy rate.

The comments create a challenging environment for incoming Fed Chair Kevin Warsh, who is scheduled to be sworn in on Friday. Warsh, previously seen as likely to oversee rate cuts, will now lead his first meeting on June 16-17 with a growing chorus of officials, including Waller and three dissenters from the April meeting, advocating for a more hawkish policy statement.

From Dove to Hawk

The policy shift is significant for Waller, who as recently as January dissented in favor of a rate cut, arguing that tariff-driven inflation would be temporary. Now, he joins a growing group of officials concerned that a series of price shocks, from tariffs to sustained high energy costs amid the conflict in the Middle East, could entrench higher inflation expectations among consumers. "It may be easy to look through a single price shock such as tariffs, but it may be more risky to look through a series of positive price shocks," Waller said.

Warsh's Dilemma

The change in tone from a previously dovish member of the Fed's Board of Governors puts incoming Chair Kevin Warsh in a difficult position. President Trump had openly sought a nominee who would favor lower interest rates, a stance Warsh had previously supported. However, with Waller's reversal and the departure of the committee's most dovish member, Stephen Miran, the path to lower rates appears to be closing, increasing pressure for a hawkish policy shift at the June meeting. Waller stated he could "no longer rule out rate hikes further down the road if inflation does not abate soon."

This article is for informational purposes only and does not constitute investment advice.