Fed Governor Waller favors quarter-point interest rate hike at next meeting

Federal Reserve Governor Christopher Waller said Friday he favors a quarter percentage point interest rate hike at the next meeting, as he awaits more evidence that inflation is moving in the right direction.

Confirmation market expectationsThe Fed may reduce the size of its rate hike, the central bank official said during the Council on Foreign Relations event in New York.

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But he also said this was not the time to declare victory over inflation, likening monetary policy to an airplane that took off fast and is now ready to descend slowly.

“And with this reasoning in mind and based on the data available at this time, there appears to be little turbulence ahead, so I currently favor a 25 basis point hike at the next FOMC meeting later this month,” Waller said in prepared remarks. “Moreover, we still have a long way to go toward our 2 percent inflation target, and I expect continued tightening of monetary policy.”

He did not specify how high he sees rates rising, and was scheduled to participate in a question-and-answer session following the speech at 1 p.m. ET.

Other officials, such as Philadelphia Fed President Patrick Harker, have pointed to a 0.25 percent increase in Jan. 31-Feb. 1 FOMC meeting, but Waller is the highest ranking member, to be clear.

While the market and the Fed appear to be on the same page as to where rates move in the short term, there is further divergence.

Central bankers have largely said they see rates higher through the end of the year, while markets see a peak in the summer and a decrease shortly thereafter.

Waller said divergence is largely about perception of where inflation is going.

During a question-and-answer session after the speech, he told CNBC’s Steve Laisman, “The market has a very optimistic view that inflation is about to melt down. There’s going to be pure deflation.” “We have a different view. Inflation is not going to just miraculously melt away. It will be a slow, hard slog to bring inflation down and so we will have to keep rates on hold for a long time and start cutting rates by the end of the year. Don’t have to.” ,

Waller was generally upbeat on the economy, noting that activity has slowed in some key sectors such as manufacturing, wage growth and consumer spending. He stressed that the Fed’s goal is not to “curtail economic activity,” but to bring it back into balance so that inflation can begin to decline.

In recent months, inflation gauges such as the consumer price index and the Fed’s favorite core personal consumption expenditure price index have come down from their peaks last summer. But he said that while the headline CPI declined 0.1%, the index excluding food and energy was still up 0.3% and “still very close to where it was a year ago.”

“Therefore, while it is possible to take one month or three months of data and present a rosy picture, I caution against doing so,” he said. “The smaller the trend, the bigger the grain of salt when swallowing a story about the future.”

But Waller said he still sees a “soft landing” for the economy, a scenario that would see “progress on inflation without seriously damaging the labor market.”

“So far, we’ve managed to do that, and I hope this progress can continue,” he said.