Waller says Fed shouldn’t ‘fight the last war’ on inflation but warns hikes still possible

Federal Reserve Governor Christopher Waller expressed concern about inflation on Monday but warned against “engaging in the last war,” saying the central bank should wait for more data before raising interest rates.

In his speech in New York, Waller said inflation goes beyond frequently mentioned factors such as increases in energy price tariffs. Instead, he cited other factors, particularly artificial intelligence, as the key reasons why price gains have remained stubbornly above the Fed’s 2% target.

Waller warned that “the desire to avoid past mistakes is often the creator of new mistakes.”

“I am aware of the mistake we made in not reacting earlier to the high inflation we observed in 2021, and I am determined not to repeat it,” he said.

However, he said this does not mean reflexively raising interest rates to prevent current price increases.

Waller said there was “still a credible case for inflation to start falling” but noted there was an “equally plausible” scenario in which inflation could remain high or rise and “will require tighter monetary policy in the near term.”

The policymaker emphasized that policymakers took a conscious approach when evaluating the main causes of inflation, which he listed as tariffs applied in 2025, rising energy prices linked to conflicts in the Middle East, and “demand-induced effects” of artificial intelligence.

“As always, we need to avoid making the mistake of fighting the last war and reacting too soon to tighten inflation because we waited too long last time,” he said. “But we must also avoid repeating the mistake we made in 2021 and 2022 by waiting too long to respond.”

Waller highlighted two factors working in the Fed’s favor this time: a stronger labor market that is not a source of meaningful inflation and inflation expectations that are firmly anchored, at least by market-based measures.

However, he warned against complacency.

“I often hear people say that central bankers do not have to respond to above-target inflation because inflation expectations are stable. This view is wrong,” he said. “Looking hard at inflation until it melts before our withering gaze is not an option.”

Waller’s remarks came a day before the Bureau of Labor Statistics releases consumer price index data for June. Economists surveyed by Dow Jones expect the gauge to show a 0.2% decline in the all-item headline for the month, due to a sharp decline in oil and a 0.2% increase in the core excluding food and energy. On an annual basis, this will reduce the headline reading to 3.8% from 4.2% in May and the core reading to 2.8% from 2.9%.

“I would be very pleased to see a lower reading on core inflation, but I would need to see a few more months of lower readings to feel like inflation is heading in the right direction after the rise in the first half of this year,” Waller said. “I still think that’s a reasonable outcome for the reasons I’ve laid out today, and I will then continue to keep the policy rate within the current target range.”

The Fed will reconvene at the end of July and markets will price the probability of a rate hike at around 39%, according to CME Group.