A top official at the Federal Reserve said the central bank might soon have to raise interest rates if this week’s inflation data comes in higher than expected.
Christopher J. Waller, a Fed governor, laid out his concerns on Monday about inflation, which has surged to a three-year high since the war with Iran began. Measures of underlying inflation, which strips out volatile food and energy items, remain stubbornly high, fueling fears that price pressures are at risk of being embedded in the economy in a more permanent way.
With the labor market relatively stable, policymakers at the Fed have put their attention squarely on inflation. Now, officials on the policy-setting Federal Open Market Committee face a stark choice: hold rates steady and risk a more persistent inflation problem or raise rates and risk unnecessarily choking off growth.
“If we get another hot reading on core inflation this week, then the FOMC will need to consider tightening monetary policy in the near term,” Mr. Waller said in prepared remarks at an event hosted by the New York Association for Business Economics. The Fed meets next to vote on rates on July 28 and 29.
Mr. Waller’s comments come just one day before the Bureau of Labor Statistics releases June’s Consumer Price Index report. It is expected to show inflation slipping to 3.8 percent compared with the same time last year and prices dipping 0.1 percent for the month. Once energy prices and other volatile items like food are excluded, “core” inflation is forecast to have inched down to 3.8 percent, following a 0.2 percent rise in monthly prices. The Producer Price Index, a measure of the costs that businesses pay for goods and services, will also be released this week.
Still, one month of moderating inflation is unlikely to be enough to convince policymakers that they have finally wrestled price pressures under control.
“I would be very pleased to see a lower reading on core inflation, but after its escalation over the first half of this year, I will need to see several months of lower readings to feel that inflation is moving in the right direction,” Mr. Waller said. “For the reasons I have laid out today, I think that is still a reasonable outcome, and I would then continue to hold the policy rate at its current target range.”
Mr. Waller, who was nominated to the Fed by President Trump during his first term, stressed that the central bank was confronting a far different backdrop than in 2021 and 2022, when it misdiagnosed the extent of its inflation problem. Inflation ended up soaring to the highest level in four decades. Back then, the labor market was a primary source of inflationary pressure. Now, it is not. Moreover, the public seemed less confident in the Fed’s ability to get inflation back under control than it does today, Mr. Waller said.
The Fed has overshot its 2 percent inflation target for roughly five years.
While Mr. Waller said there was a “credible case” for inflation to begin to fall back to the 2 percent target with rates at the current 3.5 percent to 3.75 percent level, he warned that there was an “equally plausible case that data in the coming weeks will show that inflation will remain at its elevated level or even trend higher, requiring tighter monetary policy in the near term.”
Most investors do not expect the Fed to raise rates at its next meeting at the end of this month, which will be Kevin M. Warsh’s second since taking over as chairman. But they are bracing for an increase before year’s end.
“When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation,” Mr. Waller said. “Sternly staring at inflation until it melts before our withering gaze is not an option.”
