Federal Reserve Governor Waller: The next rate hike and rate cut probabilities are equally likely, supports removing the ease bias

Federal Reserve Governor Christopher Waller stated at a meeting in Frankfurt on Friday that he supports making it clear that the chances of the Fed's next interest rate action being a hike or a cut are roughly equal. Citing the energy shock brought about by the war in Iran, he believes that the more appropriate action is to keep interest rates unchanged and wait for the war's impact to become clearer.

If inflation does not slow down quickly, Waller cannot rule out the possibility of future rate hikes. He noted that the range of consumer price increases in April is worrying, the labor market is stabilizing, unemployment rates are low and stable, but not in a state of prosperity.

“Inflation is heading in the wrong direction. Based on the latest data, I support removing the 'accommodative bias' phrase from the Fed's policy statement, thereby making it clear that the probability of rate cuts in the future is not higher than that of rate hikes.”

At the April policy meeting, the Federal Open Market Committee (FOMC) decided to keep the federal funds rate target range at 3.5%-3.75%. However, three policymakers dissented on the "accommodative bias" phrase in the statement, believing it implies that the Fed will eventually return to rate cuts.

The April meeting minutes showed that most officials warned that if inflation continues to significantly exceed the 2% target, the Fed may need to consider a rate hike. Since the April meeting, stronger-than-expected employment and inflation data have further reinforced this judgment: price pressures remain the main risk faced.

Waller believes that the current federal funds rate level still has a restrictive impact on the US economy, but the greater driver of policy has shifted to the inflation outlook, which depends on how long the war ultimately lasts.

"If I think inflation expectations are beginning to anchor, I would not hesitate to support raising the federal funds rate target range. But it's too early to act at this point. Patience should be maintained now, and the development of the conflict and related economic data should be closely observed.”

After Waller's speech, the market quickly digested the Fed's expectation of a 25 basis point rate hike by the end of the year. The Bloomberg US Dollar Index hit a daily high, and US Treasury yields experienced a V-shaped reversal, returning above 4.57%.