Fed’s Waller says huge rate hike possible amid June inflation

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Federal Reserve Governor Christopher Waller indicated Thursday that he is open to historically steep interest rate hike, calling a whopping 9.1% inflation reading for June a “major league disappointment.”

Waller said he is in favor of another three-quarter percentage point hike when Fed officials meet on July 26 – but added that he could back a full-percentage-point hike if data suggests it is needed to tame decades-high inflation.

“We have important data releases on retail sales and housing coming in before the July meeting. If that data come in materially stronger than expected it would make me lean towards a larger hike at the July meeting to the extent it shows demand is not slowing down fast enough to get inflation down,” Waller said in remarks at the Rocky Mountain Economic Summit.

A full-point rate hike would mark the first time the modern Fed has ever pulled that lever. The central bank hasn’t enacted a hike of that size since it began using overnight interest rates to guide policy in the early 1990s.

Waller provided guidance in response to a June Consumer Price Index report that he described as a “major league disappointment.” The 9.1% increase was the sharpest uptick since November 1981, adding renewed urgency to the Fed’s mission to achieve price stability.

Fed Chair Jerome Powell has said the fight against inflation is the central bank’s top priority.
Bloomberg via Getty Images

The Fed’s three-quarter percentage point hike last month was the first of its kind since 1994 – and much larger than the quarter-percentage-point increases that bank officials favor when tightening policy.

Fed funds rate futures suggest investors are now betting on a full-point hike following the inflation data release. The likelihood of a historic increase hit 67% as of Wednesday, up from less than 8% prior to the CPI release.

Meanwhile, the likelihood of a three-quarter point hike sank to 33% from 92% on Tuesday.

Jerome Powell warned the Fed has little choice but to sharply hike rates.
Jerome Powell has warned the Fed has little choice but to sharply hike rates.
AP

While Waller and other Fed officials haven’t ruled out a full-point hike, Waller said speculation that an increase of that size is a foregone conclusion due to the June CPI report is premature.

“I think the markets may have gotten ahead of themselves a little bit yesterday when they just assumed it would go to 100 [basis points] after that report,” Waller said.

Fed Chair Jerome Powell has indicated officials will do whatever is necessary to tame inflation. In June, Powell acknowledged that “further surprises” could be in store as the situation evolved.

A larger hike could exacerbate mounting fears that the Fed will be unable to achieve a “soft landing” for the economy through gradual hikes and instead tip the economy into a recession.

With interest rate hikes, the Fed is aiming to cool down spending by making forms of borrowing more expensive.

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