Fed Governor Waller sees December hike likely, opens door to possible half-point increase

Federal Reserve Governor Christopher Waller said Tuesday the central bank needs to follow through on expectations for additional interest rate hikes or risk its credibility, even suggesting that a larger-than-usual half-percentage-point increase could be warranted in December.

Speaking in London, the policymaker said he "is leaning toward" a rate increase in December even if the October inflation data comes in softer than expected — and would support "more robust action" if readings come in higher than forecast.

"In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," he said. "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."

Waller said Fed communications prior to and at the October meeting led markets already to price in additional rate hikes.

Following through, Waller added, is what's important, even if the hikes come intermittently.

"When this communication is clear and credible, what really matters is that those hikes are eventually carried out — it is not necessary, for example, to raise rates at consecutive meetings," he said. "If, however, the hikes are not carried out, markets will reduce expectations of rate hikes and rates will immediately fall, which would loosen monetary policy in an undesirable way."

Waller added that higher rates "will be needed, sooner rather than later."

"So, while the precise timing of the hikes doesn't matter, ensuring that the promised hikes are implemented in a reasonable period of time does," he said.

In its decision to pass on an October hike, the rate-setting Federal Open Market Committee said "the accumulation of more information" will help guide the proper policy path to bring down inflation. The decision was not unanimous — Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented.

The Bureau of Labor Statistics on Tuesday will release the October reading on the consumer price index, one of the last inflation reports before the central bank holds its next policy meeting Dec. 8-9.

Since the October decision, multiple Fed officials have continued to counsel patience while emphasizing the need to bring inflation back to the central bank's 2% target. Markets are pricing in a better than 80% chance of a December quarter-point hike but no chance of a half point, according to the CME Group's FedWatch.

Chicago Fed President Austan Goolsbee on Monday said the Fed has to be careful not to let the economy run too hot "because once it gets overheated, it's extremely painful to get rid of that kind of overheating."

In his remarks, Waller characterized the economy as growing "at a healthy pace" with a labor market that "has also been solid" if not dynamic in the current low-hire, low-fire climate.