Waller's Inflation Hinge: Will August Data Give Him Permission to Pause?

Federal Reserve Governor Christopher Waller's comments on September 3 gave bond markets some relief, but investors shouldn't get too excited yet. Waller suggested he would support leaving interest rates unchanged at the Fed's September 15-16 meeting, but only if the upcoming inflation data shows continued disinflation.

Waller acknowledged that inflation remains above the Fed's 2% target, with July data showing headline inflation near 3.7% and core inflation around 3.3%. However, he believes the recent trend is more encouraging than the year-over-year figures suggest, and sees evidence that underlying inflation is gradually moving in the right direction.

Waller's comments were a welcome development for investors betting on a softer rate environment, with market-implied odds of a September rate hike falling to about 54.6% after his speech. However, he emphasized that monetary policy is only slightly restrictive, and if inflation proves more stubborn than expected, the Fed won't wait long before tightening further.

The August inflation data will be crucial in determining Waller's stance on interest rates. If the numbers confirm continued disinflation, rate-sensitive investments could get a reprieve. However, a hotter-than-expected report could send Treasury yields higher again and put pressure on the same groups that benefited from Waller's comments.