Federal Reserve Governor Christopher Waller signaled Thursday that he is inclined to keep interest rates steady at the central bank's upcoming September 15-16 policy meeting if inflation data continues to show cooling pressures, while leaving the door open for potential rate hikes should price growth accelerate unexpectedly.

"My decision on the appropriate stance of policy will be heavily influenced by what we learn about August inflation," Waller told a Reuters NEXT Newsmaker event in Washington. "If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level."

Market Context

The remarks from one of the Fed's most influential policymakers came as investors had been pricing in solid odds of a quarter-percentage-point rate increase at this month's meeting. Following Waller's comments, traders quickly recalibrated expectations. The probability of a September hike fell to roughly 50-50 from approximately 60% earlier, according to futures market pricing. Bond yields, which move inversely to prices, declined on the shifting monetary policy outlook.

Analysis

Waller's measured tone reflects a central bank navigating between competing imperatives. While acknowledging that inflation remains "meaningfully above" the Fed's 2% target, he emphasized that price pressures are nonetheless making "slow but continued progress." The governor drew an unexpected cultural reference to illustrate his patience.

"I'm going to paraphrase John Lennon here. Give disinflation a chance," Waller said in remarks following his formal statement. "When it comes to monetary policy and its stance versus inflation, I'm not going to say let's wait until next year, but let's just wait and see if we get some improvement on this."

The current 3.50%-3.75% Fed funds rate is "only slightly restricting aggregate demand," according to Waller, who cautioned that "it may not take much acceleration in inflation to nudge me into supporting tighter policy." This dual-edged positioning allows the governor flexibility depending on incoming economic data.

Key Numbers

- Current Fed funds rate: 3.50%-3.75%

- Market pricing for September hike before remarks: ~60% probability

- Market pricing for September hike after remarks: ~50% probability (roughly even odds)

- Fed inflation target: 2%

What to Watch

August inflation data will be the critical determinant of near-term policy. The Bureau of Labor Statistics is expected to release the Consumer Price Index report in coming weeks, with the core measure closely watched by policymakers. Should prices come in "hot," Waller indicated he would consider supporting a rate hike at the September meeting. Conversely, continued disinflationary progress could cement expectations for a hold. Fed Chairman Kevin Warsh's recent remarks at Jackson Hole also bear watching, as he similarly signaled willingness to act should inflation pressures not moderate.

The balance of risks remains tilted toward vigilance on price growth, but Waller's Lennon reference underscores the central bank's recognition that economic cooling takes time to fully manifest in the data.