Fed Chairman Waller agrees that the central bank can “proceed with caution” on interest rates

Federal Reserve Governor Christopher Waller said on Tuesday that the latest round of strong economic data will give the central bank some time when it decides whether additional rate hikes are needed to control inflation.

“It’s been a very good week from the data we had last week, and the main thing if it allows us to proceed carefully,” Waller told CNBC’s Steve Lissmann during an interview on the Squawk Box program. “We can just sit there and wait for the data and see if things continue.”

Highlighting this data was the non-farm payrolls report released on Friday, which showed better-than-expected payroll growth of 187K in August, while average hourly earnings rose only 0.2% during the month, less than expected.

Earlier in the week, other reports showed that the Fed’s preferred measure of inflation rose just 0.2% in July, and that job openings, a key measure of labor market tightness, fell to their lowest level since March 2021.

“The biggest thing is inflation,” Waller said. “We got two good reports in a row.” The key now is to “see if this low inflation is a trend or just an anomaly or a fluke”.

Waller is generally considered one of the more hawkish members of the Federal Open Market Committee, which sets interest rates, meaning he favors tightening monetary policy and higher interest rates as the central bank battles inflation that was in the summer of 2022 at its highest rate in 2022. More than 40 years.

While he is encouraged by recent reports about where prices are headed, he said they also indicate that the Fed can keep interest rates higher until they make sure inflation is on the up.

“It depends on the data,” Waller said when asked if the price increases could stop. “We’ll have to wait and see if this inflation trend continues. We’ve been burned twice before. In 2021, we’ve seen it go down and then up. At the end of 2022, we’ve seen it go down, and then everything has been revised away.”

“So, I want to be very cautious about saying we’ve kind of done the job on inflation until we see a couple of months going on that trajectory before I say we’re done doing anything,” he added.

Markets are identifying with near certainty the chances of the Fed skipping a rate hike at its September 19-20 meeting. However, there is a 43.5% chance of an increase from October 31 to November. One session, according to CME Group’s futures pricing tracker, which indicates some uncertainty. Goldman Sachs said this week that it expects the Fed to wind down.

“I don’t think that another increase in interest rates will necessarily tip the economy into recession if we feel we need to do so,” Waller said. “It is not clear that we are in real danger of doing much damage to the labor market, even if we raise interest rates again.”

Waller’s comments come less than two weeks after Federal Reserve Chairman Jerome Powell said inflation remains very high and may require further interest rate increases, though he noted that policymakers would “tread cautiously” before making the move.