Governor Waller warns Fed may need to tighten policy soon

Governor Waller warns Fed may need to tighten policy soon

Trump says U.S. to restore Hormuz blockade, seek 20% fee on cargo Investing.com -- Federal Reserve Governor Christopher Waller said Monday that the central bank may need to tighten monetary policy in the near term if core inflation continues to rise, speaking at the New York Association for Business Economics. Core inflation, measured by the 12-month personal consumption expenditures rate, has climbed from 3.0% in December 2025 to 3.4% in May, Waller said. The increase began in January and accelerated after a Middle East conflict disrupted petroleum production and transportation.

Waller said he remains concerned about the upward trend in core inflation, which excludes direct effects of consumer energy prices. He noted that the economy has moved beyond the point where large price increases can be attributed to earlier tariff hikes. "If this upward trend continues, it will be hard to push inflation back toward the Committee’s 2 percent goal with monetary policy at its current setting," Waller said.

The governor said consumer spending has remained solid despite higher goods costs from tariffs and increased energy prices. The labor market has stayed stable, with employment close to the FOMC’s maximum-employment goal. Job creation averaged 111,000 positions per month over the past three months.

Waller identified three factors driving inflation pressure: tariffs, energy prices, and spillovers from demand related to artificial intelligence buildout. He said AI-related demand has caused price increases for semiconductors, computer chips, servers, and peripherals. The governor noted two key differences between current conditions and the 2021-2022 inflation period.

The labor market is less tight now, with the ratio of job vacancies to unemployed persons at nearly one-to-one, compared to two-to-one when the Fed started raising rates in 2022. Inflation expectations also appear well anchored, with market-based measures showing expectations of 2.1% inflation over two years. Waller said he will closely examine consumer price index data for June, which will be released Tuesday, along with producer prices the following day.

He stated he would need to see several months of lower core inflation readings before feeling confident that inflation is moving in the right direction.