Fed's Waller Backs December Rate Hike and Puts a Half-Point Move on the Table Ahead of October CPI

Since the Federal Reserve passed on a rate hike at its October meeting, with Governor Lisa Cook and Cleveland Fed President Beth Hammack dissenting, the debate has moved to December. Fed Governor Christopher Waller sharpened it on Tuesday, Nov. 10, in a speech in London.

Waller said he is "leaning toward" a 25 basis point increase at the Dec. 8-9 meeting, even if October inflation improves from September. If October looks like September, he said, "a stronger policy move may be needed."

"In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," Waller said. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."

The CPI trigger

Waller tied the larger move to core inflation. He said that if October core CPI comes in at 0.3% month over month or stronger, he would support a half-point hike. Otherwise he would lean toward a quarter point.

The Bureau of Labor Statistics releases the October consumer price index later today, Nov. 10. It is one of the last major inflation readings before the December meeting.

His read on September was blunt. "Let's just say it. September's inflation data were bad. There was no silver lining," Waller said. In September, CPI rose 0.6% on the month and 3.7% on the year. Surging gasoline prices tied to the U.S.-Iran war were part of the cause. Core inflation, which strips out food and energy, was 2.6% annually in the September data.

Waller said he was particularly concerned about how broad the price increases are. He also pointed to inflationary effects from the artificial intelligence buildout. He cited Fed research suggesting "energy price pressures may pass through to goods and services in a more sustained way than in the past."

"Inflation remains too high," he said. Higher rates, he added, "will be needed, sooner rather than later."

Credibility argument

Waller's case rests on expectations. He said Fed communications before and at the October meeting led markets to price in more hikes. If the Fed does not deliver, he argued, "markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way."

He also left room on timing. "It is not necessary, for example, to raise rates at consecutive meetings," he said. What matters is that the promised hikes are carried out in a reasonable period.

He described the economy as growing "at a healthy pace" and the labor market as solid, though low-hire, low-fire.

What markets and colleagues are saying

Markets have not priced a half-point move. CME Group's FedWatch puts the chance of a December quarter-point hike at better than 80% and the chance of a half-point hike at zero. Federal funds futures tracked by LSEG show no half-point probability either. The 2-year Treasury yield rose 4 basis points as Waller spoke.

Waller is not the only voice, and not every colleague has been so urgent. Since October, multiple Fed officials have counseled patience while stressing the 2% target. Chicago Fed President Austan Goolsbee said Monday the Fed must be careful not to let the economy run too hot, because "once it gets overheated, it's extremely painful to get rid of that kind of overheating."

Before the October meeting, New York Fed President John Williams said he was penciling in one more hike this year and none next year. Jay Woods, chief market strategist at Freedom Capital Markets, framed the internal argument then as "about the pace of tightening, not necessarily its direction."

The politics are awkward. Waller was appointed to the Board by President Donald Trump in 2020. Trump has repeatedly pushed for lower rates, and his Republican Party suffered sweeping defeats in last week's midterm elections. Fed Chair Kevin Warsh has committed to the price-stability half of the Fed's mandate after inflation spent 66 consecutive months above 2%, according to figures cited before the October meeting.

What comes next

The October CPI report lands later today. If core inflation prints at 0.3% or higher, Waller has said he would back 50 basis points. That would put him ahead of market pricing and force the rest of the committee to say where it stands before the Dec. 8-9 meeting.