• Federal Reserve Governor Christopher Waller is inclined to keep rates unchanged at the September 15-16 meeting if August inflation confirms recent disinflation progress.
  • However, a hotter inflation report could prompt him to support a rate hike, saying even a modest acceleration may justify tighter policy.
  • Economic growth remains solid and the labor market healthy, while underlying inflation is improving faster than headline core measures suggest.

A Conditional Stance

Federal Reserve Governor Christopher Waller is leaning toward keeping interest rates steady at the upcoming September meeting, according to people familiar with his thinking. But his position is far from fixed: a hotter-than-expected August inflation report could tip him toward supporting a 25-basis-point increase.

"Economic growth remains solid and the labor market healthy," Waller said in a recent speech, adding that underlying inflation is improving faster than conventional core measures suggest. His conditional approach underscores the data-dependent nature of the Federal Reserve's decision, with the next CPI and PPI releases taking center stage.

The Fed's current policy rate stands at 3.50%–3.75%. Markets have recently priced in roughly a two-thirds probability of a September hike after Chair Kevin Warsh adopted a more hawkish tone at Jackson Hole, though forecasts vary considerably among economists.

Inflation and Labor Data in Focus

Recent PCE data show headline inflation at 3.7% year over year and core PCE at 3.3%, both above the Fed's 2% goal. However, a trimmed-mean measure from the Dallas Fed is lower, at 2.3%, supporting the argument that underlying price pressures may be easing more than headline numbers suggest.

August manufacturing data complicate the picture. The ISM manufacturing PMI eased to 54.6 from 55.6 in July but remained expansionary, while the prices-paid index stayed elevated at 71.1. Respondents cited tariffs, conflict-linked shipping and energy effects, metals costs, and AI-driven electronics demand as sources of price pressure.

Labor indicators remain mixed but broadly stable. July job openings rose to 7.271 million, hiring fell to 5.054 million, and layoffs declined to 1.666 million. As one analyst put it, this is a "no-hire, no-fire" labor market rather than one showing sharp deterioration.

The Core Trade-off

Waller's conditional message reflects the Fed's basic dilemma: avoid overtightening into a slowing economy while preventing inflation from becoming entrenched above target. A soft August CPI report would strengthen the case for a hold, while a broad-based acceleration would support his stated willingness to tighten.

Manufacturers specifically identified higher steel and aluminum costs tied to Section 232 import duties and other tariff effects. The U.S.-Israeli war with Iran and disruption risks around the Strait of Hormuz are also raising energy and transport costs. Meanwhile, large-scale investment in AI infrastructure is supporting demand for semiconductors and electrical components but adding supply-chain pressures.

Treasury Secretary Scott Bessent has argued against raising rates into what he characterizes as a supply shock absent broader second- or third-round effects. That contrasts with the more precautionary view expressed by Chair Warsh and Governor Michael Barr, who have said persistently high inflation could warrant decisive tightening.

What's at Stake

A rate hike would increase borrowing costs for mortgages, auto loans, credit cards, and business loans, while potentially supporting savers' yields. A hold would avoid an immediate increase in financing costs but could draw criticism if inflation remains materially above target.

The decision will likely receive intense political scrutiny regardless of the outcome, as higher rates affect housing affordability, business investment, and federal interest costs.

Looking Ahead

The next employment data, followed by August CPI and PPI releases shortly before the meeting, are likely to determine whether Waller's position becomes the committee's median view. A soft inflation print with softer hiring would make a hold more likely; hot inflation with resilient employment would strengthen the case for a hike. Mixed data could result in an unusually close call, with the Fed holding rates but using a firm statement to preserve the option of an October hike.

Morningstar (MORN)'s cited economists see a close decision: Goldman Sachs (GS)' Jan Hatzius expects a hold if core inflation rises about 0.2% for August, while other analysts believe Warsh's framework makes a hike likely by October unless jobs and inflation data soften materially.

Correction: An earlier version of this article misstated the timing of the Fed's September meeting. The meeting is scheduled for September 15-16.