Waller flags half-point December rate rise if core CPI runs hot

• A half-point rate increase from the Federal Reserve in December may become necessary if October core CPI inflation registers around 0.3% or more
• Even if October CPI improves relative to September, a quarter-point hike in December would still get his support
• US inflation remains excessively high, and September's inflation data was poor
• He was prepared to hold off on policy tightening in October; the key is that promised rate increases are carried out within a reasonable timeframe
• He is especially worried about how widespread price rises are
• He suspects GDP growth is moderating in the current quarter, but output is still expected to increase at a solid pace
• Fed staff projections indicate further producer price increases are coming, and the energy price shock could be longer-lasting
• The labour market is solid, supply and demand are roughly balanced, and employment is near the Fed's target
• It is unclear whether the labour market is as healthy as the jobless rate implies; questions about dynamism and productivity growth need more research

Federal Reserve Governor Waller's comments are notably hawkish, as he signals that a December rate increase would be justified regardless of today's inflation figures. The data would only affect the size of the move: a 0.3% or higher month-over-month core CPI reading would lead him to back a larger 0.5% increase.

Waller emphasised that US inflation remains far too high and called September's inflation report disappointing. He had been willing to delay further policy tightening at the October meeting, but stressed that what counts now is delivering the promised rate increases within a reasonable period. He also voiced concerns over the breadth of price increases, suggesting inflationary pressures are more widespread than he would prefer.

He acknowledged that GDP growth might be slowing in the current quarter, though he still expects output to expand at a solid clip. He noted that Fed staff analyses indicate additional producer price increases are coming and warned that the energy price shock might prove more persistent than originally anticipated.

On the labour market, Waller described conditions as largely solid, with supply and demand roughly in balance and employment close to the Fed's goals. Yet he cautioned that the unemployment rate alone might not fully capture the labour market's health, pointing to questions about labour market dynamism and productivity growth that need further study.

Waller is a highly influential governor who has served as a leading indicator for Fed policy since 2021. He was willing to give disinflation a chance in September but has now sharply changed his stance. The probability of a December hike jumped to 99% following Waller's remarks (the remaining 1% being for a 0.5% increase).