Federal Reserve Governor Christopher Waller said the central bank needs to deliver on widely expected interest rate increases or risk damaging its credibility, even suggesting that a half-percentage-point rise could be appropriate at the December policy meeting. Speaking in London on Tuesday, Waller said he is leaning toward a rate increase in December regardless of whether October inflation data comes in softer than expected, and would back larger action if readings exceed forecasts. A half-percentage-point hike should be considered at the December meeting, Waller said, warning that a smaller quarter-point increase alone "would put our credibility at risk, a risk I am not eager to take."
Waller explained that Fed communications before and during the October meeting have already led financial markets to price in additional rate hikes. The central bank's credibility depends on following through on those signals, even if the timing of increases is spread out rather than consecutive. "When this communication is clear and credible, what really matters is that those hikes are eventually carried out," Waller said. "If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way."
The Fed's rate-setting committee chose not to raise rates at its October meeting, citing a need for more information to guide policy decisions aimed at bringing inflation back to the central bank's 2% target. Two officials dissented from that decision. The US Bureau of Labor Statistics is releasing the October consumer price index reading on Tuesday, one of the last inflation reports before the Fed holds its next policy meeting on December 8-9. According to CME Group's FedWatch data, markets are pricing in better than an 80% probability of a quarter-point December increase, though they assign no likelihood to a half-point hike.
Other Fed officials have struck a more cautious tone since October. Chicago Fed President Austan Goolsbee said Monday the central bank must be careful not to let economic growth become excessive, as bringing down an overheated economy is extremely costly. Waller characterized the current economic situation as sound, with the economy growing at a healthy pace and the labor market remaining solid despite a low-hiring, low-firing environment.
For savers, borrowers and businesses in the United States, larger interest rate increases would mean higher costs for loans but better returns on savings accounts and money market funds. The timing and size of Fed rate decisions directly influence mortgage rates, credit card charges and returns on deposits.