Waller's Rate Hike Dilemma: Lower Long-Term Rates or Tame Inflation

The Federal Reserve's new chairman, Waller, is facing a classic policy question: should he raise interest rates to combat inflation, even if it may lower long-term rates and achieve the Trump administration's goal of reducing mortgage rates?

This 'Greenspan conundrum' reappears as Waller prepares for an interest rate hike this week. The bond market has priced in a 38% probability of an increase in the federal funds rate target, up from less than 10% before Waller's Senate Banking Committee hearing.

The logic behind raising rates is that it would enhance credibility against inflation and compress long-term inflation premiums, driving down mortgage rates. However, factors like price moderation and internal reviews pose short-term constraints.