Waller Cites AI as Inflation Driver, Hikes Still Possible
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- Christopher Waller cautioned against "fighting the last war" on inflation but said rate hikes remain possible, urging the Fed to wait for more data before tightening policy.
- Waller identified artificial intelligence, 2025 tariffs, and Middle East energy prices as root causes of inflation holding above the Fed's 2% target, expanding beyond traditional demand drivers.
- Waller acknowledged the Fed's 2021 mistake of responding too late to inflation but said that doesn't mean reflexively hiking now, citing both a "credible case" for inflation to fall back and an "equally plausible" scenario requiring tighter policy.
- Waller pointed to a stronger labor market that's not a meaningful inflation source and well-anchored market-based inflation expectations as factors working in the Fed's favor this cycle.
- Waller pushed back against complacency, saying "sternly staring at inflation until it melts before our withering gaze is not an option" and that anchored expectations don't excuse inaction on above-target inflation.
- Economists surveyed by Dow Jones expect the June CPI release to show a 0.2% monthly decline in the headline reading (down to 3.8% annually) and a 0.2% core increase (to 2.8% annually).
- Markets are pricing in about a 39% chance of a rate increase at the Fed's late July meeting, according to CME Group data.
Why it matters: Waller is reserving the right to hold rates steady if June CPI confirms cooling — but he's explicitly warning against the 'transitory' complacency the Fed fell into in 2021. With markets pricing a 39% July hike probability and core inflation expected to remain sticky at 2.8%, his data-dependent stance means the late-July meeting becomes a binary event: several months of softer prints trigger patience, but a single hot surprise could force his hand.
