Fed governor backs ‘significant increase’ in benchmark rate

A governor on the board of the Federal Reserve has backed “another significant increase” in the US central bank’s benchmark policy rate later this month, saying the resilience of the economy gives officials the “flexibility to be aggressive” in the fight against inflation.

The comments from Christopher Waller, who sits on the Federal Open Market Committee, come on the final day that officials can publicly speak ahead of their next policy meeting.

“The fears of a recession starting in the first half of this year have faded away and the robust US labour market is giving us the flexibility to be aggressive in our fight against inflation,” he said at an event hosted by the Institute for Advanced Studies in Austria.

“Based on what I know today, I support a significant increase at our next meeting on September 20 and 21 to get the policy rate to a setting that is clearly restricting demand,” he added.

In contrast to past meetings, most policymakers have resisted endorsing a specific policy action ahead of the gathering, leaving open the debate of whether the Fed will deliver a third consecutive 0.75 percentage point rate rise or shift to implementing a half-point rise.

Expectations have grown in recent days that the central bank will opt for the more aggressive option, which would lift the federal funds rate to a new target range of 3 per cent to 3.25 per cent.

Waller on Friday became the latest top official this week to emphasise the Fed’s commitment to rooting out elevated inflation and stress the risks of the central bank easing policy prematurely. If inflation does not ease or rises further this year, he added that the policy rate will “probably” need to move “well above” 4 per cent.

Earlier on Friday, James Bullard, the hawkish president from the St Louis Fed, told Bloomberg TV he is leaning “more strongly” towards a 0.75 percentage point rate rise. Esther George, president of the Kansas City Fed, who also spoke Friday, said that by taking “deliberate” action, the Fed can prevent higher inflation from becoming entrenched.

“While I welcome promising news about inflation, I don’t yet see convincing evidence that it is moving meaningfully and persistently down along a trajectory to reach our 2 per cent target,” said Waller. “The consequences of being fooled by a temporary softening in inflation could be even greater now if another misjudgment damages the Fed’s credibility.”

Waller’s comments echo those of chair Jay Powell, who spoke on Thursday. While Powell did not comment on the size of the next rate rise, he said the Fed needs to “act now, forthrightly, strongly, as we have been doing and we need to keep at it until the job is done”.

Lael Brainard, the vice-chair, on Wednesday delivered a similar message, saying the Fed is “in this for as long as it takes to get inflation down”. 

However, she balanced those comments by emphasising a number of forces that may help to alleviate inflationary pressures, such that the Fed may not need to act as aggressively as once feared. She also noted the inevitable shift “at some point” to consider the risks of overtightening policy.

Ahead of the September gathering, another inflation report will be released, with economists expecting a fall in the consumer price index on both a month-on-month and annual basis.

Waller said on Friday the future decisions about both the size of additional rate rises and the end point of this tightening cycle should be “solely determined by the incoming data”.