Fed's Waller says 'more comfortable' with smaller hikes after recent data

Federal Reserve governors Michelle Bowman and Christopher Waller pose for a photo, during a break at a conference on monetary policy at Stanford University's Hoover Institution, in Palo Alto, California, U.S. May 6, 2022. Picture taken May 6, 2022. REUTERS/Ann Saphir/File Photo

WASHINGTON, Nov 16 (Reuters) - U.S. Federal Reserve Governor Christopher Waller, an early and outspoken "hawk" in the central bank's efforts to confront inflation, said Wednesday he is now "more comfortable" with smaller rate increases going forward, though how high rates ultimately need to go depends on how decisively inflation slows.

In remarks prepared for delivery at an Arizona State University economic conference, Waller said he will not make a final decision about what to do at the Fed's Dec. 13-14 policy meeting until the rest of the data between now and then is reviewed, and remains skeptical that inflation has now decisively turned the corner.

"I will not be head-faked by one report," Waller said of consumer price data released last week that saw larger than expected declines in both headline inflation and a narrower but more closely watched index of "core" prices. "We've seen this movie before."

He said the push for price stability at the Fed was "still a one-sided campaign," with rates moving higher and no current trade-off with jobs - the Fed's other goal - that needs to be balanced against the inflation battle.

With job growth still strong and unemployment at a low 3.7%, "we are not seeing the typical trade off that you think a central bank has to make between driving down inflation and causing all these kinds of job losses," Waller said.

"Go after inflation. The job market is giving this to you. So go after it," he said.

But he also acknowledged the most recent reports were a "positive development" that he hoped would be "the beginning of a meaningful and persistent decline in inflation" back to the Fed's 2% target. After raising rates in atypically large three-quarter point increments at its last four meetings, Waller said that as it stands "the data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike," in December and possibly to smaller quarter-point increases after that.

The Fed's latest policy statement flagged a likely step down in the size of upcoming rate hikes, with officials shifting focus to a more nuanced approach that gives them more time to monitor how the economy and inflation are behaving while leaving themselves free to keep pushing rates higher.

Recent positive news on inflation has led investors to bet the Fed may not have to do as much as expected, and may only need to raise the target policy rate to around 5%. It is currently set in a range of between 3.75% and 4%.

Waller said signs the economy and wage growth are slowing have added to his sense that Fed policy is beginning to do its job.

But he cautioned it was too early to pin down just how high rates may need to go.

"One report does not make a trend. It is way too early to conclude that inflation is headed sustainably down," he said. "Getting inflation to fall meaningfully and persistently toward our 2% target will require increases in the federal funds rate into next year. We still have a ways to go."

Reporting by Howard Schneider and Ann Saphir; Editing by Andrea Ricci and Deepa Babington

Our Standards: The Thomson Reuters Trust Principles.

Thomson Reuters

Covers the U.S. Federal Reserve, monetary policy and the economy, a graduate of the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and on the local staff of the Washington Post.