Federal Reserve Gov. Christopher Waller said he expects the Federal Open Market Committee to raise short-term interest rates if inflation does not show signs of easing, a signal that the central bank's policy bias has shifted back toward restraint. Speaking at the Istanbul Economic Forum on Thursday, Waller said additional hikes would support "a timelier" return to the Fed's 2% inflation goal should inflation readings remain elevated. The remarks matter because they come just weeks before the FOMC's next scheduled meeting on Oct. 27-28, and they suggest the committee is preparing markets for a possible resumption of tightening after a period of holding rates steady.
Waller said there is "some flexibility about when those hikes will occur," and that the hikes "do not need to come at consecutive meetings, but they should be in place within an acceptable period of time." He attributed his shift in focus from the employment side of the Fed's dual mandate to inflation to a "culmination of factors that developed over the past year." Those factors include higher energy prices and concerns that trade conflicts could trigger another round of tariffs. Waller said he had supported holding the policy rate steady through the spring and summer because he believed the inflation surge tied to the war in Iran would fade. That did not happen, he said, and three forces "undermined [his] faith in this progress": the Middle East conflict did not end quickly, with experts warning that low inventories and damaged infrastructure could keep oil prices elevated through 2027; the artificial intelligence buildout is driving up prices for high-tech consumer goods; and trade conflicts could result in new tariffs that put upward pressure on inflation "yet again."
Waller pointed to market pricing as evidence that Fed communications have already shaped expectations. He said federal funds futures prices as of Thursday showed markets were pricing in an 85% chance of at least one rate hike by the end of the FOMC's December meeting and nearly a 20% chance of two hikes. By the March 2027 meeting, markets were pricing in nearly an 80% chance of at least two hikes and a 33% chance of three or more. Waller also said that between the Summary of Economic Projections and policymakers' outlook speeches, markets have interpreted that the Committee is likely to raise the policy rate 50 basis points in the coming months. He framed this signaling as helpful: "This signaling helps to anchor the path of short-term interest rates but provides flexibility in adjusting rate hikes based on incoming data." The evidence is corroborated across independent sources, including American Banker and National Mortgage News, both of which carried the same remarks and market pricing figures.
The implications are broad for rate-sensitive sectors. A resumption of hikes would raise borrowing costs for mortgages, auto loans, and business credit, and could pressure equity valuations that have relied on expectations of stable or falling policy rates. Waller's emphasis on energy prices, AI-related goods inflation, and tariff risks suggests the Fed is now more concerned about persistent supply-side and geopolitical price pressures than about labor market weakness. He noted that the unemployment rate remains relatively low and near the median of policymakers' projections of its longer-run level, while payroll gains are in the range of estimates of breakeven to keep the unemployment rate steady. That framing reduces the urgency to protect employment and increases the room to prioritize inflation.
Still, the outlook remains conditional. Waller said the hikes should be in place "within an acceptable period of time," but he did not specify a precise timetable, and he tied the path to incoming data. The dossier does not include the full text of his prepared remarks or the question-and-answer session, and it does not provide the August inflation reading that Waller described as "hot" or the specific tariff proposals under consideration. The next FOMC meeting on Oct. 27-28 will be the first formal test of whether the committee as a whole endorses Waller's shift, and the market pricing he cited could change quickly if inflation data surprise in either direction.