Inflation Is Still Above Target. Fed Governor Christopher Waller Says Rate Hikes Could Still Be Coming

Federal Reserve Governor Christopher Waller said Monday that the U.S. central bank should avoid overreacting to inflation based on the mistakes of the past, while making clear that interest rate increases remain on the table if price pressures fail to ease.

Speaking at the New York Association for Business Economics ahead of the release of the latest Consumer Price Index report, Waller urged policymakers to take a measured approach as they assess whether inflation is becoming entrenched again.

While he acknowledged that the Federal Reserve made the mistake of “not responding sooner to the high inflation we observed” in 2021, he warned against making the opposite mistake by tightening monetary policy too quickly this time.

“The desire to avoid past mistakes is often the author of new ones,” Waller said in prepared remarks. The comments come at a critical moment for financial markets, with investors closely watching whether persistent inflation will force the Fed to resume raising interest rates after months of holding policy steady.

Waller argued that today’s inflation looks different from the post-pandemic surge that prompted the Fed’s aggressive tightening cycle. Instead of being driven primarily by supply chain disruptions or temporary energy shocks, he said current price pressures reflect a broader mix of forces.

Among those factors are tariffs introduced in 2025, higher energy costs linked to conflict in the Middle East, and what he described as “spillovers from demand” created by the rapid expansion of artificial intelligence investment and spending.

Those developments, he said, require policymakers to carefully determine whether inflation will naturally moderate or whether additional monetary tightening becomes necessary.
“There is still a credible case for inflation to begin to fall back,” Waller said. At the same time, he acknowledged there is an “equally plausible” scenario in which inflation remains elevated or even accelerates, “requiring tighter monetary policy in the near term.”

Despite the uncertainty, Waller emphasized that the Federal Reserve should not simply assume another round of interest rate hikes is inevitable. “As always, we need to avoid making the mistake of fighting the last war and reacting too soon to tighten inflation, merely because we waited too long last time,” he said. “But we also must avoid repeating the same mistake we made in 2021 and 2022 by waiting too long to respond.”

The Fed governor pointed to two important differences between today’s economy and the one that fueled the previous inflation surge. First, he said the labor market remains strong but is no longer acting as a significant driver of inflation through rapidly rising wages.

Second, inflation expectations remain relatively well anchored, particularly according to market-based measures, reducing the risk that consumers and businesses begin expecting permanently higher prices.

Still, Waller cautioned against complacency. “I often hear people say that because inflation expectations are anchored, central bankers do not have to respond to above-target inflation. This view is wrong,” he said. “Sternly staring at inflation until it melts before our withering gaze is not an option.”

His remarks came one day before the Bureau of Labor Statistics was scheduled to release its June Consumer Price Index report, one of the Fed’s most closely watched inflation indicators.

Economists surveyed by Morningstar expect headline CPI to decline 0.2% for the month, largely reflecting lower oil prices. On an annual basis, forecasts call for headline inflation to ease to 3.8% from 4.2% in May, while core inflation, which excludes food and energy, is expected to slow slightly to 2.8% from 2.9%.

Waller said one encouraging inflation report would not be enough to convince him that price pressures are moving sustainably toward the Federal Reserve’s 2% target. “I would be very pleased to see a lower reading on core inflation, but after its escalation over the first half of this year, I will need to see several months of lower readings to feel that inflation is moving in the right direction,” he said.

If inflation follows that path, Waller said he would support keeping the federal funds rate at its current target range rather than tightening policy further. Markets, however, continue to see meaningful odds that another rate increase could come soon. According to CME Group’s FedWatch tool, traders were pricing in roughly a 39% probability of a rate hike at the Federal Reserve’s late July meeting.