Christopher Waller, U.S. President Donald Trump’s nominee for governor of the Federal Reserve, listens during a confirmation hearing before the Senate Banking Committee in Washington, DC, Thursday, February 13, 2020.
Andrew Harrer | Bloomberg | Getty Images
Federal Reserve Governor Christopher Waller said on Friday he favors a quarter-percentage-point rate hike at the next meeting as he waits for more evidence that inflation is heading in the right direction.
Confirming market expectations, the central bank official said at a Council on Foreign Relations event in New York that the Fed may scale back the size of rate hikes.
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But he also said it is not time to declare victory over inflation, comparing monetary policy to an airplane that rose rapidly higher and is now ready for a gradual descent.
“And in line with that logic and based on the data in hand at the moment, there appears to be little turbulence going forward, so I would prefer a 25 basis point hike at the FOMC’s next meeting at the end of this month,” Waller said in prepared remarks . “Beyond that, we still have a significant way to go towards our 2 percent inflation target, and I expect to support continued monetary policy tightening.”
He did not specify how high he sees prices going, and was scheduled to participate in a question-and-answer session after the 1:00 PM ET speech.
Other officials, such as Philadelphia Fed President Patrick Harker, have pointed to a 0.25 percentage point increase at the Jan. 31-Feb. 1 FOMC meeting, but Waller is the highest-ranking member to be so explicit.
While the market and the Fed appear to be on the same page with where interest rates are going in the near term, there is divergence further out.
Central bankers have generally said they see interest rates being held at a high level through the end of the year, while markets see a peak in the summer and then a reduction shortly thereafter.
Waller said the divergence is largely about perceptions of where inflation is going to go.
“The market has a very optimistic view that inflation is just going to melt away. The immaculate disinflation is going to happen,” he told CNBC’s Steve Liesman during a question-and-answer session after the speech. “We have a different view. Inflation isn’t just going to melt away miraculously. It’s going to be a slower and harder fight to bring inflation down, and so we have to keep rates higher for longer and not start cutting rates by the end of the year.”
Waller was generally upbeat on the economy, noting that activity has slowed in some key areas such as manufacturing, wage growth and consumption. He emphasized that the Fed’s goal is not to “halt economic activity,” but rather to bring it back into balance so that inflation can begin to fall.
In recent months, inflation gauges such as the consumer price index and the Fed’s preferred core price index for personal consumption expenditures have come off their peaks last summer. But he noted that while the headline CPI fell 0.1%, the index excluding food and energy still rose 0.3% and “is still too close to where it was a year ago.”
“So while it’s possible to take a month or three months of data and paint a rosy picture, I caution against doing that,” he said. “The shorter the trend, the bigger the grain of salt when swallowing a story about the future.”
But Waller said he still sees a “soft landing” as possible for the economy, a scenario that would see “progress on inflation without seriously damaging the labor market.”
“So far we have been able to do that and I remain optimistic that this progress can continue,” he said.