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

Federal Reserve Governor Christopher Waller said Monday that another hot reading in Tuesday's consumer-price index could force the central bank to raise interest rates "in the near term." Waller, generally seen as one of the more dovish members of the Federal Open Market Committee, took a markedly more hawkish line in a speech at a monetary policy conference.

Fed funds futures now price a 77% probability of a quarter-point rate increase at the September meeting, up from about 58% a week earlier, according to CME data. The pricing shift reflects Waller's warning as well as a rise in Brent crude above $85 a barrel on heightened Middle East tensions, which adds to concerns that higher energy costs could lock in above-target inflation.

Waller described monetary policy as being at a "crossroads." Recent inflation readings have come in higher than expected, and another such print would change his view. "If I get another higher one, I'm going to treat that as signal, not noise," he said. He cautioned that "sternly staring at inflation until it melts before our withering gaze is not an option," arguing the Fed should not wait too long to respond if price pressures persist.

The governor acknowledged a "credible case" remains for inflation to drift back toward the Fed's 2% goal without further tightening. He also expressed growing concern that price pressures are becoming more widespread rather than concentrated in tariffs and energy. Nearly 70% of core services categories now show both three-month and twelve-month inflation above 3%, he noted.

Waller said the labor market remains stable and inflation expectations are anchored, giving the Fed room to act if needed. "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 stressed that it would take "several months of lower readings" before he would be convinced inflation was sustainably returning to target.

The dollar strengthened against most major currencies after Waller's comments, with the Bloomberg Dollar Spot Index rising 0.2%. Traders said the move reflected repricing of rate expectations rather than a broad shift in risk appetite. A hotter-than-expected CPI would likely push the dollar higher and weigh on risk-sensitive currencies, several strategists said.

The June CPI report is due at 8:30 a.m. Tuesday. Fed Chair Kevin Warsh is scheduled to testify before the House Financial Services Committee later that day.