• Federal Reserve Governor Christopher Waller supports a 25-basis-point rate increase in December, even if October inflation data improves, and says a 50-basis-point hike should be considered if core CPI rises 0.3% or more.
  • Waller warns that monetary policy has been less restrictive than he previously believed, citing strong GDP growth, low unemployment, and inflation well above the Fed's 2% target.
  • Markets repriced expectations for a December hike following his remarks, with Treasury yields rising as investors digested the tougher stance.

A Firmer Stance

Federal Reserve Governor Christopher Waller is pushing for another interest-rate increase in December, arguing that policy has not been tight enough to bring inflation sustainably back to the central bank's 2% goal. In a speech Thursday, Waller said he favors a quarter-percentage-point hike but would advocate for a half-point move if the upcoming October consumer price index report shows core inflation rising by 0.3% or more. The remarks, delivered ahead of the Labor Department's 8:30 a.m. EST release of October CPI data, underscore a growing divide within the Fed over how aggressively to combat price pressures.

Waller's comments come as economists polled expect core CPI—which excludes food and energy—to rise 0.2% month over month. But the governor made clear that even a softer reading would not deter him from supporting further tightening. "If inflation improves as I expect, I still lean toward a quarter-point hike in December," Waller said, according to prepared remarks. "But if core CPI comes in at 0.3% or higher, we should consider a larger move to protect our credibility."

The speech painted a picture of an economy that remains resilient despite the fastest pace of rate increases in decades. Waller cited third-quarter real GDP growth of 3.4%, an unemployment rate of 4.1%, and September PCE inflation running at 3.7% year over year, with core PCE at 3.1%. More than 70% of core services components recorded annual price increases above 3%, he noted, suggesting inflation is broadening rather than retreating.

Labor Market Cracks

While the headline unemployment rate remains low, Waller cautioned that a "low hire, low fire" environment may be masking underlying weakness. The share of unemployed workers out of work for at least 27 weeks has risen from around 18% at the end of 2022 to more than 27% through September 2026, he said. Young entrants to the labor force are also struggling to find work, and businesses have cited tariffs, immigration-policy changes, and uncertainty surrounding artificial intelligence as reasons for restraining hiring.

Waller's concerns extend beyond domestic factors. He flagged costly shipping through the Strait of Hormuz, rising insurance expenses, and constraints on diesel refining as reasons energy pressures could persist. Fed research discussed in his speech suggests sustained oil-price shocks could affect core inflation well into 2027, challenging the traditional view that energy shocks fade quickly. "Monetary policy must respond to inflation even when part of the pressure originates in international supply disruptions," Waller said.

AI: A Cost Pressure, Not a Cure

The governor also pushed back on the idea that AI-driven productivity gains will quickly offset inflation. While the AI buildout is boosting demand for high-tech equipment, Fed staff research does not suggest those price pressures will fade soon. Broad-based productivity gains from AI remain years away, Waller said, supporting a cautious outlook rather than a reliance on technology to solve current inflation problems.

Market reaction was swift. Treasury yields climbed after his comments as investors increased bets on a December hike. The yield on the 10-year Treasury note rose to 4.45%, while the 2-year yield, which is more sensitive to Fed policy, climbed to 4.62%, according to preliminary data. Futures markets now price a roughly 70% chance of a quarter-point increase at the December meeting, up from about 50% before Waller's speech.

The Fed's next policy meeting is scheduled for December 12-13. While Waller's views carry weight, they do not represent a commitment from the full Federal Open Market Committee. Fed Chair Jerome Powell has not publicly commented on the December decision since the October meeting, when the committee held rates steady. A Fed spokesperson declined to comment on Waller's remarks.

Credibility and the Road Ahead

Waller's argument is rooted in credibility. He supported the October pause because prior Fed communications had already led markets to anticipate tightening, but he insists those anticipated increases must eventually materialize. Failing to deliver, he warned, could lower market interest rates and unintentionally loosen financial conditions—the opposite of what the central bank intends.

The immediate test will be this morning's CPI report. A core reading of 0.2% would align with Waller's base case for a quarter-point hike, while a 0.3% print could tip the balance toward a larger move. Either way, Waller's remarks signal that the Fed's fight against inflation is far from over, even as the labor market shows tentative signs of cooling.

Investors will also parse Friday's University of Michigan consumer sentiment survey for signs of inflation expectations, which have remained elevated in recent months. The Fed's preferred inflation gauge, the PCE price index, will be released later this month.

This article was updated to clarify that Waller's 0.3% threshold refers to core CPI, not headline inflation.