Fed’s Waller: Another Hot CPI Could Force Near-Term Rate Hike

Federal Reserve Governor Christopher Waller struck a markedly more hawkish tone on Monday, warning that another upside surprise in Tuesday’s CPI report could force the FOMC to consider raising interest rates “in the near term.” The shift is notable because Waller has generally been regarded as one of the more dovish members of the Committee. His remarks come as geopolitical tensions in the Middle East have driven Brent crude above $85, adding to concerns that higher energy prices could reinforce already persistent inflation pressures. Reflecting the changing backdrop, Fed funds futures now imply a 77% probability of a September rate hike, up sharply from around 58% just a week ago.

Describing monetary policy as being at a “crossroads,” Waller made clear that upcoming inflation data will heavily influence his thinking. “If I get another higher one, I’m going to treat that as signal, not noise,” he said, referring to the recent string of elevated inflation readings. He cautioned that “sternly staring at inflation until it melts before our withering gaze is not an option,” underscoring his view that the Fed should not repeat the mistake of waiting too long to respond if inflation proves more persistent than expected.

Waller acknowledged there remains “a credible case” for inflation to gradually return to the Fed’s 2% objective with policy left unchanged. However, he expressed growing concern that inflation is becoming more broad-based rather than being confined to tariffs and energy costs. Nearly 70% of core services categories are now recording both three-month and twelve-month inflation above 3%, suggesting underlying price pressures are spreading through the economy. Against a backdrop of a stable labor market and anchored inflation expectations, he argued that the Fed has room to tighten further if necessary without acting prematurely.

The immediate focus now turns to Tuesday’s June CPI report, which Waller identified as the next major policy test. “If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term,” he said. At the same time, he emphasized that it would take “several months of lower readings” before he would be convinced inflation is sustainably moving back toward target. His comments raise the stakes ahead of the inflation release and set the stage for Fed Chair Kevin Warsh’s first congressional testimony later in the day, where markets will look for confirmation—or a different interpretation—of the inflation outlook.