Fed Governor Waller: Cooling Inflation Still Doesn't Rule Out September Rate Hike

TradingKey — Federal Reserve Governor Christopher Waller stated that although U.S. inflation remains noticeably above the Federal Open Market Committee's (FOMC) 2% target, recent data shows signs of cooling. If data released over the next two weeks continues to improve, he would lean toward supporting keeping the federal funds rate unchanged; however, if August inflation rebounds, he may support a rate hike at the September 15–16 FOMC meeting.

The official noted that U.S. economic fundamentals remain resilient. In the first half of 2026, real U.S. GDP grew at an annualized rate of 1.8%, while private domestic final purchases expanded by 3%, indicating that consumption and business investment continue to provide strong support for economic growth. Although retail sales weakened in July, this was partly due to Amazon's Prime Day promotion being moved earlier to June, and consumer spending excluding non-store retailers continued to grow.

On the business investment front, the construction of AI data centers and technology upgrades continue to drive capital expenditure. The official stated that high-tech investment has maintained rapid growth, and software investment has not come under significant pressure despite enhanced AI coding capabilities. He rejected the view that AI investment artificially inflates GDP, arguing that AI, like the internet, will become deeply integrated into the future economy.

The labor market has not deteriorated significantly either. Data shows that in the first seven months of this year, U.S. payrolls added an average of about 60,000 jobs per month, with the July unemployment rate dropping to 4.1%, while layoffs and initial jobless claims remained at low levels. With a stable labor market, the focus of monetary policy decisions will shift more to the trajectory of inflation.

Regarding inflation, the PCE price index rose 0.2% month-on-month in July, and core PCE also increased 0.2% month-on-month. Over the past 12 months, the PCE inflation rate was 3.7%, and core PCE was 3.3%. However, the official believes that 12-month data may not best reflect current trends and that more attention should be paid to recent changes: the annualized three-month core inflation rate through July fell to 3.05% from 4.76% in February.

He pointed out that most price impacts from tariffs have already passed through, and rising energy prices have not yet broadly spilled over to other goods and services. However, energy costs, price increases for tech products driven by AI buildouts, and potential new tariffs still pose upside risks to inflation.

The official emphasized that if August inflation continues to cool toward the 2% target, maintaining current interest rates would be a reasonable choice; however, if progress on inflation reverses, a modest policy tightening might be necessary to prevent long-term inflation expectations from rising.