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

• US monetary policy remains insufficiently restrictive, in Fed Governor Christopher Waller’s view.
• 0.3% monthly inflation in October could call for a more forceful policy response.
• Bringing inflation down requires higher interest rates, the Fed Governor argues.

Higher interest rates are needed to curb inflation, Federal Reserve (Fed) Governor Christopher Waller argues on Tuesday. His remarks strike a hawkish tone, according to Reuters.

Main points

0.3% monthly US CPI inflation in October would indicate a move away from target and call for more aggressive policy action.

I expect it will be some time before AI delivers broad-based productivity gains.

Maintaining the current degree of monetary policy restraint requires real rates to increase.

Policy has proved far less restrictive than I had expected.

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

When asked about sharp share price movements, says they generally have little bearing on his interest rate outlook.

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

Dollar response

101.70 is the approximate level of the US Dollar Index (DXY), up 0.05% on Tuesday. Waller’s hawkish remarks prompt a rebound in the US Dollar (USD), erasing its earlier losses.

December Rate Hike Could Be Larger as Waller’s Inflation Concerns Mount

9/10 was the FXS Speechtracker score for Fed Governor Waller’s remarks, far above the historical average of 7.3/10. The reading highlights a distinctly more hawkish message and a clear shift towards tighter policy. Waller explicitly left open a half-point FED rate increase in December if October core CPI comes in at around 0.3% or higher. He also backed at least a quarter-point increase even if the data improve. Together, these positions signal a strong policy response to any indication that inflation is moving away from target. His focus on widespread price pressures, continued strength in growth and labour market conditions, and a less restrictive policy stance than previously assumed reinforces upside risks for the Dollar and front-end yields.

A 3.17-point increase took the FXS Fed Sentiment Index to 145.50. The gauge remains firmly in hawkish territory, consistent with the high FXS Speechtracker score. Together, the readings suggest that markets see renewed determination to tighten policy. Expectations are shifting towards larger and potentially faster rate increases should forthcoming inflation figures fail to demonstrate convincing progress.