Fed Officials Willing to Raise Rates, But Only If Convinced Inflation Not Receding

– Key Inflation, Other Data Eagerly Awaited Before Some Make Up Their Minds

By Steven K. Beckner

(MaceNews) – With barely two weeks to go before Federal Reserve policymakers gather to take fresh stock of the economy and reconsider their short-term interest rate settings, Fed officials are letting it be known they are willing to support at least one rate hike — but only if they become more convinced that inflation is not receding.

There is substantial support for tightening monetary policy somewhat, judging from the latest comments by Fed officials, but it is highly conditional on key economic data that will be arriving between now and the Sept. 15-16 meeting of the Fed’s rate-setting Federal Open Market Committee.

So, while a variety of officials have indicated this week that they’re prepared to back a modest hike in the federal funds rate on Sept 16, it is far from a done deal.

Fed Gov. Christopher Waller, who has developed a more “hawkish” reputation of late, said Thursday that he would vote for a rate hike on Sept. 16 if August inflation readings come in “hot,” but said that if they don’t he would be willing to keep the federal funds rate steady in its current target range of 3.50% to 3.75%, where it’s been since the FOMC concluded a series of rate cuts last December.

Gov. Michael Barr was explicit about his willingness to tighten monetary policy Tuesday, declaring, “if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.” But he too allowed for the possibility that the FOMC could remain on hold for a while longer.

New York Fed President John Williams sounded even more ambivalent Wednesday, citing “encouraging” inflation trends and indicating that he would need to be persuaded that a more restrictive monetary policy is really needed.

Cleveland Federal Reserve Bank President Beth Hammack, who has been vocal in calling for a tighter monetary stance, focused Thursday afternoon on rising costs and how they are affecting business leaders and other people in her Fourth Fed District.

The comments come closely on the heels of Fed Chairman Kevin Warsh strongly anti-inflationary comments at the Kansas City Fed’s Jackson Hole symposium last Friday.

While asserting that he was unwilling to provide either “forward guidance” or a “reaction function,” Warsh declared that the Fed “must be confident that underlying inflation is moving to our objective, clearly and at sufficient speed.”

“Otherwise, we have work to do,” he said. “That’s our job . . . our mandate . . . and our charge to keep.”

Although many on Wall Street are anticipating a 25 basis point hike in the Fed’s policy rate on Sept. 16, that is still not a foregone conclusion, in the minds of many officials — not until further, incoming data is analyzed.

Some, notably the three Federal Reserve Bank presidents who dissented in favor of an immediate rate hike at the July 28-29 FOMC meeting, think it’s past time for monetary tightening. But there have been indications of less urgency among other policymakers.

Overall, official comments suggest a certain amount of inertia and hesitancy, mixed with hope that inflation will moderate more or less on its own.

The always “data dependent” Fed may be even more so at this critical juncture. “Wait and see” is a commonly used phrase.

A number of important economic reports will be arriving before the mid-September FOMC meeting, starting this Friday with the August employment report, which is expected to show a rebound from July’s surprising 23,000 decline in non-farm payrolls.

Conceivably, a relatively strong reading of labor market conditions, coupled with unacceptably high inflation, might make it hard for Warsh and company to further delay tightening.

Most important, the Labor Department will be releasing its producer and consumer price indexes next Thursday and Friday, from which the Fed will be making an estimate of its preferred inflation gauge, the price index for personal consumption expenditures (PCE).

Already, there has been some discouraging news on inflation from the Institute of Supply Management. The prices paid component of its closely watched purchasing manager’s index for manufacturing registered an elevated 71.1, far above the break-even 50 level, the same as in July, showing that prices continued to increase at an unabated pace last month.

Even more concerning might be the price component of the ISM’s services index, which rose from 70.3 to 72.6 in August, reflecting an even faster pace of price increase.

Survey respondents in the machinery sector told the ISM, “Prices continue to rise on all goods. Suppliers are noting that energy, steel and labor costs are increasing very quickly. We continue to try to move products around to offset costs. We have moved more products to offshore sources to try to minimize cost impacts.”

In the same vein, the Fed’s latest survey of economic conditions around its 12 districts found continued price pressures, although they varied from one region to another. The so-called Beige Book, prepared for review at the September FOMC meeting by the Minneapolis Fed using grassroots information collected through August 24, said “the pace of price increases was the same in eight Districts, decreased in three, and increased in one. Input price pressures were notably elevated in manufacturing and construction across multiple Districts…”

Against that backdrop, officials have been looking ahead to upcoming official, inflation reports and talking about how they might affect their policy decision.

Waller, who became more strident in calling for rate action to counter inflation in recent months, continued to voice a willingness to raise rates Thursday, but in a more contingent and carefully balanced way.

“As of today, the labor market is stable, with employment near its maximum sustainable level, and inflation is making slow but continued progress on reaching 2%….,” he told Reuters, but he said forthcoming inflation and other data will be critical to how he will vote on Sep[. 16

“If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level,” he said. “But if inflation comes in hot, I would consider a rate hike.”

“I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy,” he continued. “If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes.”

Elaborating in response to questions, Waller expressed hope that a “roll-off” of tariff effects and stabilization of energy prices could lead to better inflation numbers. But if not, or if the downtrend in inflation reverses, he said it would be “time to pull the trigger.”

Officials who have overtly urged rate hikes have argued that financial conditions are not sufficiently restrictive, but Waller countered that this is not true for “Main Street’ and for people who are not invested in the stock market. For average people, seeking to finance a home or car purchase, rates are not low, he said.

Williams, the FOMC vice chairman, made clear he remains on the fence about raising rates in a CNBC appearance Wednesday.

When it comes to the choice he’ll be making at the September FOMC meeting, it will “depend on the data and depend on some of the risks to achieve our goals,” he said. “My view is that we just have to keep watching” the data going into the meeting.

“I think that we have to wait and see,” Williams said. “There’s no clear signs right now whether monetary policy currently is sufficient to make sure we bring inflation back to target in the next year or two, or whether you need to see further action to do that.”

Sounding less worried about inflation than some of his Fed colleagues, Williams said, “I am actually seeing the trend in inflation moving slowly down as some of the effects of the tariffs kind of move into the rearview mirror. But we have to be data dependent. Have to keep watching that data.”

“The (inflation) data recently have been encouraging…, but again we can’t just look at a month or two,” he said.

Williams disputed contentions that rising bond yields reflect inflation pressures or deteriorating inflation expectations.

“What’s driving (bond yields higher) is really a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general,” he said, “so I see this as more of a reflection of the strength of the economy.”

Barr was forthright Tuesday in expressing his willingness to tighten monetary policy, barring evidence that inflation is moderating.

“Inflation remains too high—and has been for over five years,’ he said at the Second-Chance Lending Forum in Washington, D.C. “We made enormous progress from inflation’s peak of more than 7 percent in 2022 to a bit above 2 percent in 2024, but that progress stalled in 2025.”

“A series of shocks—from tariffs and then the conflict in the Middle East, as well as from the rapid AI build-out—pushed us off course,” he continued. “And core non-housing services inflation remains elevated.”

Barr warned that “with inflation above target for a protracted period, there is a risk of broader price pressures taking hold, a risk I am watching closely.”

At the upcoming FOMC meeting, “if trends in the data give me some confidence that inflation is moderating on a path to 2%, then I think we can take a bit more time to assess our policy stance,” he said.

“However,” Barr added, “if inflation appears not to be moderating sufficiently, then I think we should act decisively to raise rates.” .

Hammack, one of the three Fed presidents who dissented against holding the funds rate steady and in favor of raising rates in late July, kept up her expressions of concern about inflation Thursday.

Citing anecdotal information from her region, she pointed to “the Sandusky, Ohio, restaurant owner who told me recently that his insurance costs have tripled in the past three years, so that he’s had to make the tough choice to drop some coverage and is instead betting on himself” and to “the father working in a factory in Erie, Pennsylvania, who shared that even though he works a full-time job, rising costs mean that he’s not able to afford to go to his son’s travel spring football games.”

Hammack lamented that “workers in low- to moderate-income jobs are stuck in survival mode with many working paycheck to paycheck.”