Federal Reserve Governor Christopher Waller said on September 3 that if next week’s August CPI data shows continued progress toward the Fed’s 2% inflation target, he would support holding the federal funds rate steady at 3.50%-3.75% at the September 15-16 policy meeting. The remarks, delivered at a Reuters NEXT Newsmaker event in Washington, directly contrast with Chairman Kevin Warsh’s more hawkish posture from the Jackson Hole symposium last week and immediately moved markets in a dovish direction across global equities, bonds, and crypto markets.
“My take is that underlying inflation is doing better than the core numbers suggest,” Waller told the audience. He added that he does not see elevated energy prices and tariffs as significant sources of ongoing inflation pressure, and that his earlier concern about higher energy prices bleeding into goods and services prices “hasn’t come to pass.”
Give disinflation a chance
Waller’s tone stood out for its measured patience in contrast to the rate-hike narrative that had been building since Warsh’s Jackson Hole comments. CME FedWatch currently prices 66% odds of a September rate hike, down from 64% earlier this week but still elevated. Waller’s remarks suggested he would be on the other side of that bet, at least for now.
“I’m going to paraphrase John Lennon here: give disinflation a chance,” Waller said. “We can wait one meeting. What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%.”
He acknowledged that headline inflation at 3.7% and core at 3.3% for July remain “meaningfully above” the Fed’s 2% target, but argued that recent trends suggest disinflation is continuing. He pointed to falling core services ex-housing inflation as a “considerable improvement” and noted that the speed of the downward trajectory is encouraging.
August CPI is the deciding factor
Waller emphasized that his decision on rates will be “heavily influenced” by the August CPI report, scheduled for release on September 10. If that data shows continued progress toward 2%, he said he would support holding rates steady. But he left the door open to a hike if inflation does not cooperate.
“If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes,” Waller said. “I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy.”
The distinction matters for markets. A rate hold would ease pressure on risk assets, including crypto, which have been selling off on hawkish Fed expectations. Bitcoin rallied to $78,400 following Waller’s comments, and the two-year Treasury yield fell six basis points to 4.33%, suggesting traders were repricing the rate path lower.
Warsh vs. Waller
The split between Warsh and Waller highlights a genuine debate within the Fed about the pace of tightening. Warsh, who took over as chairman earlier this year, has signaled that the central bank may need to act aggressively to bring inflation back to target, particularly given the inflationary pressure from higher oil prices and tariffs.
Waller’s counter-argument is that the underlying inflation trajectory is better than headline numbers suggest, and that the Fed risks over-tightening into a slowdown. The ADP private payrolls report on September 2 showed the weakest hiring since January, with 38,000 jobs added versus expectations of around 60,000. Manufacturing shed 17,000 positions ahead of Friday’s nonfarm payrolls report, while the services sector added a modest 41,000.
Wall Street will get another employment data point on September 4 with the nonfarm payrolls report. But Waller made clear that for him, the August CPI print is the number that matters most. “I’m not going to say let’s wait until next year,” he said, “but let’s just wait and see if we get some improvement on this.”
Initial jobless claims for the week came in at 206,000, up slightly from 203,000 the prior week but still at historically low levels, suggesting the labor market remains tight even as hiring slows. The four-week average rose to 207,250 from 205,500.
The broader market reaction reflected the shift in expectations. S&P 500 futures rose 0.46% ahead of the open, while European stocks held steady. Oil prices continued climbing, with WTI crude at $92.94 per barrel and Brent at $97.45, adding to inflation concerns even as Waller argued the impact has been muted so far.
The contrast between Waller and Warsh also reflects a deeper question about the Fed’s reaction function going forward. Warsh has emphasized that the central bank must act decisively when inflation is above target, regardless of what the underlying trend looks like. Waller’s view is that the trend is what matters, and that the data over the past three months shows a clear disinflationary trajectory that warrants patience and further observation before any tightening action is taken by the committee.
Markets now face a week of waiting. The nonfarm payrolls report on September 4 will set the tone for Friday trading, but the real event risk is the CPI data on September 10. If August inflation shows continued deceleration, Waller’s patient stance could gain broader support on the FOMC. If it does not, the rate-hike camp will have the upper hand heading into the September 16 decision. The two-year Treasury yield, already at 4.33%, will be the first market to signal which direction traders expect.
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