Waller Signals December Rate Hike, Says a Half-Point Increase May Be Needed

Preface

Federal Reserve Governor Christopher Waller has indicated that he is leaning toward another interest rate increase in December, even if the next inflation report shows some easing. Speaking in London on Tuesday, he argued that the central bank must deliver on the rate hikes markets have been led to expect. If inflation is higher than anticipated, he said, policymakers should consider a larger-than-usual increase of half a percentage point. Waller’s remarks highlight a tension facing the Federal Reserve: officials must respond to inflation while ensuring that their communications remain credible and that policy does not unnecessarily destabilize the economy. The comments came after the Federal Open Market Committee (FOMC) chose not to raise rates in October and ahead of the next scheduled meeting on Dec. 8-9. The central issue is not simply when rates rise, but whether previously signaled increases are ultimately carried out.

Lazy bag

Waller says he is leaning toward a December rate increase and believes a half-point move should be considered if inflation readings exceed expectations. He cautions that failing to deliver anticipated hikes could weaken the Fed’s credibility and cause market interest rates to fall, loosening policy. Although markets see a better than 80% chance of a quarter-point increase, they assign no chance to a half-point move. The Fed’s next decision is scheduled for Dec. 8-9, following the October consumer price index report. Waller’s central message: maintain credible guidance while bringing inflation back to the Fed’s 2% target.

Main Body

Federal Reserve Governor Christopher Waller said Tuesday that the central bank should follow through on expectations for additional interest rate increases. In remarks delivered in London, he indicated that he is leaning toward raising rates at the December meeting, even if October inflation data is softer than expected. If the data instead comes in higher than forecast, Waller said he would support more forceful action, including consideration of a half-percentage-point increase.

Waller’s argument centers on the relationship between the Fed’s public guidance and its credibility. In his view, communications before and during the October meeting led financial markets to expect further rate increases. If the central bank does not eventually implement those anticipated increases, markets may revise their expectations downward. That change could push interest rates lower and loosen monetary conditions, working against the Fed’s efforts to restrain inflation.

“In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting,” Waller said, referring to a scenario in which inflation readings are higher than expected. He added that limiting the response to 25 basis points could put the Fed’s credibility at risk, a risk he said he was not eager to take. His remarks therefore leave open the possibility of a larger move, while making clear that it would depend on incoming evidence.

Waller distinguished between the precise timing of rate increases and the broader commitment to implement them. He said the hikes do not necessarily need to occur at consecutive meetings. If the Fed communicates clearly and credibly, he argued, it can pause between increases while still following through within a reasonable period. The important point, in his view, is that markets should not conclude that promised action has been abandoned.

That distinction matters because interest rates reflect both current policy decisions and expectations about future decisions. If investors expect the Fed to raise rates, borrowing costs can respond before an increase is formally announced. Conversely, if expectations fall because policymakers fail to act as signaled, rates may decline. Waller warned that such a decline would loosen monetary policy in an undesirable way, potentially making it harder to bring inflation down.

He also said that higher rates “will be needed, sooner rather than later.” At the same time, he did not present the exact schedule as the main concern. Instead, he emphasized that the Fed needs to ensure promised increases are implemented within a reasonable time frame. This approach leaves room for officials to consider new economic information while maintaining a clear overall direction for monetary policy.

The comments follow the FOMC’s decision to leave rates unchanged in October. In explaining that decision, the rate-setting committee said “the accumulation of more information” would help guide the appropriate policy path for lowering inflation. The decision was not unanimous: Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented. The division underscores that policymakers may differ over how quickly or forcefully to respond, even as they share the stated objective of bringing inflation down.

One important piece of new information is the October consumer price index (CPI) report. The Bureau of Labor Statistics was scheduled to release the reading on Tuesday. It is one of the last inflation reports available before the Fed’s next policy meeting, scheduled for Dec. 8-9. Waller’s comments suggest that the report could affect the size of the next move: softer data would not necessarily remove his inclination to raise rates, while hotter data could strengthen the case for a half-point increase.

Since the October decision, several Fed officials have urged patience. Their comments have also reiterated the importance of returning inflation to the central bank’s 2% target. Patience in this context does not necessarily mean that policymakers have ruled out further tightening. Rather, officials are weighing incoming evidence and considering how much additional restraint is needed to slow price increases without imposing unnecessary costs on economic activity.

Market expectations differ from the more forceful option Waller described. According to the CME Group’s FedWatch, markets are pricing in a better than 80% chance of a December quarter-point hike, but no chance of a half-point increase. This contrast illustrates the gap between the move investors currently consider likely and the larger increase Waller says could warrant consideration if inflation data exceeds forecasts. Market pricing reflects expectations, not a guarantee of what policymakers will decide.

Chicago Fed President Austan Goolsbee also addressed the risks of managing economic conditions. On Monday, he said the Fed must be careful not to let the economy run too hot, warning that once it becomes overheated, cooling it can be “extremely painful.” His remarks reflect a concern that delayed action could make the eventual adjustment more difficult. Waller’s focus on credibility and follow-through similarly points to the consequences of allowing expectations or inflation pressures to move in a direction inconsistent with the Fed’s goals.

Waller described the current economy as growing “at a healthy pace.” He said the labor market “has also been solid,” although it is not dynamic in the current low-hire, low-fire climate. That characterization suggests an economy that remains resilient while hiring and job separations are relatively subdued. It provides context for the policy debate: officials are assessing inflation and employment conditions together rather than viewing rate decisions in isolation.

Overall, Waller’s remarks do not amount to a final decision on the December rate move. They set out a conditional case for action: he leans toward an increase even if inflation data is softer than expected, and believes a 50 basis point increase should be considered if the readings are higher than forecast. His warning about credibility adds a separate consideration to the debate. The Fed must assess the data, but it must also consider how the public and markets interpret its guidance. The December decision will therefore depend on both economic evidence and the central bank’s effort to keep its policy signals credible.

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