– Waller: FOMC Has ‘Flexibility’; No Need To Hike at Consecutive Meetings
– Musalem: Rates Need to Go Higher to Curb Inflation ‘In Timely Manner’
By Steven K. Beckner
(MaceNews) – Federal Reserve officials have continued this week to lean decidedly toward further tightening of U.S. monetary policy but have given themselves leeway as to the timing of further interest rate hikes.
With a late October meeting of the Fed’s rate-setting Federal Open Market Committee looming, there have been no clear indications that Chair Kevin Warsh and his fellow policymakers are inclined to raise the federal funds rate again that soon after hiking for the first time in three years a few weeks ago.
Recent data, including softer than expected jobs numbers and modest improvement in inflation, seem to have increased the odds that the FOMC will take a pass on raising rates again at its Oct. 27-28 meeting.
FOMC participants projected only one additional rate hike this year in their quarterly Summary of Economic Projections on Sept. 16, and that increase now seems likely to come at the Dec. 8-9 meeting.
Beyond that, officials have not projected further hikes but some do think more will be needed to ensure inflation falls to the 2% target “in a timely manner,” to use Warsh’s words.
Meanwhile, the Trump administration has kept up pressure on the Fed – if not to lower rates, then to at least not make monetary policy more restrictive. The criticisms have been less shrill than during the tenure of former Chair Jerome Powell. Wednesday night but the pressure has continued, with Treasury Secretary Scott Bessent repeating his call on the Fed to ”be patient” on interest rates and give productivity a chance to curb inflation Wednesday night.
Mercurial Fed Gov. Christopher Waller said Thursday morning he anticipates more rate hikes but said the FOMC has “some flexibility” on their timing and said they don’t need to come “at consecutive meetings,” as long as they come over “an acceptable period of time.”
Those remarks tended to reinforce comments last week by Warsh’s two top lieutenants – New York Federal Reserve Bank President John Williams and Federal Reserve Board Vice Chair Phillip Jefferson – that were widely interpreted as signaling delay.
St. Louis Fed President Alberto Musalem also favored additional monetary firming Thursday but was vague about whether the FOMC should raise rates again later this month, saying he has “an open mind” about that. He said the Fed’s real policy rate needs to go higher over the next 18 months if inflation is to be brought down to 2% “in a timely manner.”
Minneapolis Federal Reserve Bank President Neel Kashkari, one of three bank presidents who dissented in favor of raising rates at the July 28-29 FOMC meeting, also made an appearance Thursday, but steered clear of commenting on monetary policy, confining himself to saying he has an eye on the Treasury market and on demand for dollar assets.
Earlier in the week, Kansas City Fed President Jeffrey Schmid called Tuesday for more monetary tightening but was not specific about when or by how much.
The FOMC raised the federal funds rate by 25 basis points to a target range of 4.75% to 5.0% on Sept. 16 – nine months after completing a series of rate cuts totaling 175 basis points over 15 months.
FOMC participants, not including Warsh, projected only one more 25 basis point rate hike to a median 4.1% (a range of 4.0% to 4.25%) by the end of this year, where officials anticipate it staying through 2027. However, market participants are speculating about more rate hikes.
Warsh described the rate hike as a “start” toward showing the FOMC is “serious” about fulfilling its pledge to “deliver price stability,” ostensibly implying there’s an indefinite amount of additional tightening to come.
Minutes of the Sept. 15-16 FOMC meeting released Wednesday simply disclosed that “most participants assessed that another increase in the target range for the federal funds rate would likely be appropriate by year end.”
Since FOMC participants lavished such fulsome praise on the economy in mid-September, some cracks have appeared in the labor market, and there have been more encouraging signs of moderation in inflation, perhaps making policymakers less eager to raise rates again.
On Sept. 30, the Commerce Department reported that inflation, as measured by the price index for personal consumption expenditures, rose a less than expected 3.4% in August from a year earlier. The core PCE rose 3.3%, also less than expected.
Then, last Friday, the Labor Department announced softer than expected jobs data for September. Nonfarm payrolls rose a much less than expected 29,000, and prior months’ payrolls were revised down by 60,000. What’s more, the unemployment rate ticked up a tenth to 4.2%.
These recent economic data have gone in the direction of keeping the FOMC on track for further tightening, but not necessarily as soon as the late October meeting.
Together, the inflation and jobs data were seen on Wall Street as greatly diminishing the odds of an Oct. 28 rate hike, especially when considered in the light of comments from two top Fed policymakers. First, Williams, the FOMC vice chairman, speaking even before those two reports, said he saw “no urgency” to raise rates.
Later last week, Jefferson made more nuanced comments that were also interpreted as signaling delay. After saying the FOMC had taken “an important step” in combating inflation with its Sept. 16 rate hike, he chose his words carefully: “As we look ahead, my view is that any future adjustments in policy should be determined by carefully examining trends in the data, the evolving outlook, and the balance of risks.”
“Since our September meeting, yields across the term structure have increased further, a sign that investors are reassessing the evolving macroeconomic landscape,” he continued. “My colleagues and I will need to come to our own judgment, which may take more time.”
Waller spoke in the same vein Thursday morning.
“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,” he said at a Turkish central bank forum in Istanbul. “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,” added Waller, who earlier this year favored cutting rates while being considered by the White House to succeed Powell.
Explaining his shift toward tightening, he cited various forces that “were undermining (his) faith in (disinflationary) progress”, so that by the time of the September FOMC meeting, “it was impossible to deny that inflation was still too high and not making sufficient progress toward our target.”
Waller said he voted to raise rates because of “a preponderance of evidence over several months that the risks for monetary policy had shifted, reflecting a strengthened labor market and a range of persistent inflationary forces. For me, this led to the judgment that the policy setting that the FOMC maintained from December 2025 through September of this year would not be sufficient to return inflation to 2 percent in a timely manner….”
He added that he is “concerned that the recent acceleration in inflation—after what soon will be five and a 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.”
Cleveland Fed President Beth Hammack is usually thought of as being on the “hawkish” side of the policy spectrum, having dissented in favor of a late July rate hike, but she too took a go-slow approach last Friday following the employment report.
“We will have more information before the meeting at the end of the month,” she said. “There is ample time to determine the appropriate policy stance to ensure we fulfill both mandates.”
But other officials sounded considerably more willing to tighten further without much delay.
Not everyone has been so conflicted. Schmid said flatly Tuesday that the FOMC must increase the funds rate further to bring down inflation, even while acknowledging that rising bond yields may weaken interest-sensitive sectors of the economy.
Dallas Fed President Lorie Logan, who joined Hammack in dissent at the July 28-29 FOMC meeting, went so far as to declare the funds rate needs to go up another 50 basis points.
Musalem avoided specific monetary policy prescriptions Thursday, while making clear he favors a more restrictive Fed stance over time. At the current funds rate setting, he said the funds rate, as well as financial conditions more generally, are “accommodative.”
“Inflaiton is elevated above target and is being driven by persistent demand pressures and recurring negative supply shocks,” he said at a Bloomberg event. “The important thing is to bring inflation back to 2% in a timely manner.”
Musalem, who will return to the FOMC voting ranks in 2028, added that “it is important to contain any further broadening of inflation pressures” due to strong demand in a robust, fully employed economy.
In order to bring inflation down “in a timely manner,” he said “more monetary firming will be required.”
But Musalem was vague about the timing, saying he will go into the late October meeting “open minded” without “prejudging’ the outcome.
To him, reducing inflation to target “in a timely manner” means over an 18 month period. Doing so “implies rates ought to be going up further in an appropriate period of time,” he added.
Like many of his colleagues, Musalem said the FOMC can and should focus on inflation, because the economy is “very strong,” even “overheated” in some ares, and the labor market is “stable and balanced.”
By raising short-term rates to reduce inflation, he said the Fed can actually boost the economy by avoiding further increases in longer term rates that drive up financing costs in interest-sensitive sectors like housing.
Musalem said bond yields have been rising “because real yields rising, and real yields are rising because, almost entirely, the expected real policy rate has been rising…”
“What’s not happening” is a rise in longer run inflation expectations, he went on, adding that they “remain anchored,” showing “there are not questions about the Fed’s credibility.”