Higher interest rates needed to curb inflation, says Fed's Waller

• Is US monetary policy insufficiently restrictive? Fed Governor Christopher Waller believes so.
• More aggressive policy action could be needed if October’s monthly inflation reading comes in at 0.3%.
• Bringing inflation down requires higher interest rates, in the Fed Governor’s view.

Higher interest rates are needed to exert downward pressure on inflation, Federal Reserve (Fed) Governor Christopher Waller argues in hawkish remarks on Tuesday, according to Reuters.

What are the key takeaways?

More aggressive policy action would be needed if US monthly CPI for October comes in at 0.3%, suggesting inflation is moving away from target.

For a while yet, I don’t expect AI to deliver broad-based productivity gains.

Maintaining the degree of monetary policy restrictiveness requires real rates to rise.

I had thought policy was far more restrictive than it has actually been.

To exert downward pressure on inflation, we need to increase rates.

Responding to a question on sharp share price movements, says these are generally not important to his interest rate outlook.

Presidential appointments to the Fed will face a check from Democrat control of Congress.

How did markets respond?

Reversing its earlier losses, the US Dollar (USD) recovers after Waller’s hawkish remarks. The US Dollar Index (DXY) trades near 101.70 on Tuesday, a gain of 0.05%.

Could mounting inflation concerns prompt a larger December hike, as Waller signals?

A stronger bias towards tighter policy emerges from Fed Governor Waller’s notably more hawkish remarks: his FXS Speechtracker score of 9/10 is well above the historical average of 7.3/10. He explicitly leaves open a half-point FED rate hike in December should October core CPI come in around 0.3% or higher, while backing at least a quarter-point increase even if the data improve. Together, these positions indicate a strong policy response to any indication that inflation is moving away from target. Upside risks to the Dollar and front-end yields are reinforced by his focus on broad-based price pressures, continued strength in growth and labour market conditions, and his assessment that policy has been less restrictive than previously believed.

Remaining firmly in hawkish territory, the FXS Fed Sentiment Index climbed 3.17 points to 145.50, consistent with the high FXS Speechtracker score. Taken together, the readings suggest that markets are focusing on renewed determination to tighten policy. Expectations are moving towards higher and potentially faster rate increases should incoming inflation figures fail to demonstrate convincing progress.