Key Points

  • Federal Reserve Governor Christopher Waller said Monday that policymakers are at a "crossroads" and may soon need to raise the benchmark interest rate as inflation heats up and remains above the 2% target.
  • "If core inflation data comes in hot again this week, then the FOMC will need to consider tightening monetary policy in the near term," Waller said in remarks.
  • "I am concerned that the pace of core inflation this year, as measured by 12-month personal consumption expenditures (PCE), has risen steadily from 3% in December 2025 to 3.4% in May," he said.

In-Depth Analysis

Despite inflation exceeding the Fed's target, Waller last year pointed to signs of a weakening labor market and called on colleagues to cut the federal funds rate. From September to December 2025, the Fed cut its key interest rate by 25 basis points three times.

Waller said the policy environment has changed since then, noting that "data in recent months support the view that the labor market is stable and balanced." At the same time, "no matter how you measure it, or what indicators you use, inflation has been rising this year," he said.

"When inflation is well above target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring inflation down," Waller said. "Merely staring sternly at inflation until it melts under our gaze is not an option."

According to the CME Group's FedWatch tool, interest rate futures traders on Monday priced a 43.3% probability that the Fed will raise rates by 25 basis points at its next two-day meeting ending July 29, up from 34.2% last Friday.

Waller's remarks align with comments made by Fed Chair Kevin Warsh at his first press conference on June 16. Warsh repeatedly emphasized then that the central bank aims to curb price pressures and end the five-year period of inflation above target.

"I am monitoring price developments and am vigilant about the risk that rising core inflation may indicate that inflationary pressures are spreading across the economy," Waller said.

"The FOMC must be prepared to tighten monetary policy to prevent a repeat of the 2021-2022 inflation episode," Waller said. During much of 2021, many Fed officials mistakenly called rising price pressures "transitory."

"Looking ahead, due to falling oil prices, I do expect headline inflation to moderate, starting with this week's inflation data," he said. "But I will focus on core inflation, and in that regard, there are recent signs of continued pressure on goods prices," Waller said. Core inflation excludes volatile food and energy prices.

The U.S. Bureau of Labor Statistics is scheduled to release June consumer price index data on Tuesday.

While pointing to inflation risks, Waller said the economy appears to be in good shape. "Despite higher goods costs from tariffs and an energy price spike from the Middle East conflict, household and business spending has been resilient," he said. "The labor market has also remained stable, with employment near the FOMC's maximum employment goal."