Fed's Waller Leans Toward December Hike, Floats Half-Point Option

Federal Reserve Governor Christopher Waller isn't waiting for the inflation data to make up his mind. Speaking in London on Tuesday, Waller said he is leaning toward a rate increase in December even if October's inflation reading comes in softer than forecast. And if it comes in hotter? He wants a bigger swing. A 50 basis point hike at the December meeting should be considered in that case, he said, warning that a quarter-point move alone would put the Fed's credibility at risk.

The Fed's own messaging is why, according to Waller. Communications before and at the October meeting already pushed markets to price in more hikes, so following through is what counts. He noted the hikes don't need to land at consecutive meetings. The danger, as he put it, is that if the promised hikes never happen, markets will cut their expectations and rates will drop immediately, loosening monetary policy in an undesirable way. Higher rates, he added, will be needed sooner rather than later.

The rate-setting Federal Open Market Committee passed on a hike in October, saying it wanted the accumulation of more information to guide policy. That call wasn't unanimous: Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented. The Bureau of Labor Statistics releases October's consumer price index on Tuesday — one of the last inflation reports before the Fed's next meeting on Dec. 8-9. Markets are pricing better than an 80% chance of a December quarter-point hike and no chance of a half point, per CME Group's FedWatch.

Other officials have kept preaching patience since October, stressing the push back to the Fed's 2% inflation target. Chicago Fed President Austan Goolsbee said Monday the Fed must be careful not to let the economy run too hot, because once it overheats, it's extremely painful to get rid of that kind of overheating. Waller, for his part, described the economy as growing at a healthy pace, with a labor market that has been solid if not dynamic in the current low-hire, low-fire climate.