Waller says Fed shouldn't 'fight the last war' on inflation but warns hikes still possible

• Waller identified artificial intelligence spillovers, 2025 tariffs, and Middle East energy price impacts as current inflation drivers beyond traditional causes
• June CPI data expected to show headline inflation declining to 3.8% from 4.2% and core inflation to 2.8% from 2.9%, though Waller said he needs 'several months' of lower readings before feeling confident
• Markets price in 39% chance of a rate hike at the Fed's late July meeting, as Waller emphasized both avoiding premature tightening and not repeating 2021's delayed response

Summary

Federal Reserve Governor Christopher Waller warned against prematurely raising interest rates despite elevated inflation, cautioning the Fed shouldn't "fight the last war" by overreacting to past policy mistakes. Speaking in New York on Monday, Waller acknowledged the Fed's 2021 error of waiting too long to address inflation but emphasized the need for more data before tightening policy.

Key Points:

Waller identified three current inflation drivers beyond traditional factors:

• Tariffs implemented in 2025
• Rising energy prices from Middle East conflicts
• Demand spillovers from artificial intelligence expansion

He outlined two scenarios: inflation falling back toward target or remaining elevated/increasing, which would require tighter monetary policy. However, two favorable factors exist: a strong labor market not contributing significantly to inflation and well-anchored inflation expectations.

Data and Market Implications:

The June Consumer Price Index (CPI), released Tuesday, is expected to show:

• Headline CPI: -0.2% monthly (declining to 3.8% annually from 4.2% in May)
• Core CPI: +0.2% monthly (2.8% annually, down from 2.9%)

Waller stated he needs "several months of lower readings" before confirming inflation is moving toward the Fed's 2% target. Until then, he supports maintaining current policy rates.

Markets are pricing in approximately 39% probability of a rate hike at the Fed's late July meeting, according to CME Group data.

Bottom Line:

Despite inflation concerns, Waller advocates a measured, data-dependent approach rather than reflexive tightening, though rate increases remain possible if inflation persists above target.