U.S. Federal Reserve (Fed) Governor Christopher Waller suggested on Thursday that additional rate hikes would likely be needed to lower inflation to the Fed's 2% target, but added there was "flexibility" about the pace of increases and left the door open for a pause at the Fed's upcoming October meeting.
"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2% goal," Waller said in remarks prepared for delivery at the Istanbul Economic Forum.
The Central Bank of the Republic of Türkiye (CBRT) organized the two-day forum to address global economic policy challenges by gathering central bank governors and high-level policymakers from around the world, including the U.S. and the U.K.
"But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be in place in an acceptable period of time," Waller said.
The Fed decided to hike rates by 25 basis points to the 3.75%-4% range at September's Federal Open Market Committee (FOMC) meeting after maintaining rates steady for nine months, following 75 basis points of cumulative rate reductions across the final three meetings of last year to combat labor market softening.
Waller's comments add to those of other Fed officials in recent days, suggesting they will likely keep the policy rate on hold when they meet on Oct. 27-28, with a rate increase likely in December if incoming data shows an economy with continued low unemployment, ongoing growth, and only limited, if any, immediate progress in lowering inflation.
Investors currently see the Fed keeping rates steady at the October meeting, just a week before U.S. congressional elections, but raising rates six weeks later at the Dec. 8-9 policy session.
U.S. annual inflation stood at 3.4% in August.
Waller did not say how much further he feels the policy rate may need to rise to tamp down inflation that is currently more than a percentage point above the Fed's target.
But he said the case for higher rates has become clear with the economy strengthening, an energy price shock from the Iran war still unresolved, and new concerns that the artificial intelligence buildout is adding to inflation through increased demand for key goods and services.
"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... will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation."
He is the third top Fed official in recent days to indicate a willingness to wait before raising rates again, while leaving open a clear potential need to eventually boost borrowing costs further – a message that investors seem to have absorbed in setting expectations for the coming Fed meeting.
That has occurred in the absence of any commentary by Fed Chairman Kevin Warsh, who took over as the top central banker, saying he wanted to avoid providing too much guidance about coming policy decisions.
Waller and others, however, have continued talking. In his remarks on Thursday he laid out how recent comments by his colleagues had helped markets set probabilities about the interest rate path without promising any particular outcome — a better policymaking approach, he argued, that avoids the volatility that can occur if investors are left without any signal at all.
Policymakers can "signal where they are likely headed while acknowledging that there is no fixed final destination," Waller said, the latest among several Fed officials to argue that a fuller shutdown of Fed policy communications would be unwise.
"This signaling helps to anchor the path of short-term interest rates but provides flexibility in adjusting rate hikes based on incoming data."