As tensions between the U.S. and Iran escalate, international oil prices have surged, indicating a potential rebound in inflation. This has led to increased support for a rate hike within the U.S. Federal Reserve. Christopher Waller, a prominent dove within the Fed, stated that if inflation continues to rise, the central bank should consider tightening monetary policy in the near future.
On July 13, Waller made his remarks at an event in New York, saying, "If core inflation comes in high again this week, the Federal Open Market Committee (FOMC) should consider tightening monetary policy soon."
The U.S. Department of Labor is set to release the Consumer Price Index (CPI) for June, including core CPI, at 9:30 p.m. Korean time on July 14. According to Bloomberg's market forecast, the CPI is expected to rise by 3.8% year-over-year in June, a slowdown from May's 4.2% increase.
Waller assessed that the U.S. economy remains in good shape, citing a stable labor market and robust consumer demand. However, he noted that rising tariffs, energy prices, and inflationary pressures from increased investment in artificial intelligence (AI) infrastructure have put monetary policy at a "crossroads." He remarked, "Inflation has risen this year by any measure, and the current pace of core inflation is concerning."
The Fed's preferred inflation measure, the core Personal Consumption Expenditures (PCE) price index, rose by 3.4% year-over-year in May. Waller pointed out that the core PCE has been on a steady upward trend since January, prior to the outbreak of conflict between the U.S. and Iran.
Since May, Waller has opened the door to the possibility of a rate hike. He previously stated, "If I believe that expected inflation is beginning to move away from a fixed level, I will not hesitate to support an increase in the target range for the federal funds rate."
The renewed conflict between the U.S. and Iran has also contributed to rising international oil prices, exacerbating inflation concerns. Brent crude closed up 9.6% at $83.30 per barrel, marking the largest single-day increase since May 2020. West Texas Intermediate (WTI) also surged 9.4% to $78.14 per barrel. As a result, even if the previous month's inflation index shows a slowdown, there are concerns that it may rise again starting this month.
Waller also indicated that if inflation were to slow, the Fed could maintain its current stance on interest rates. However, he emphasized that to consider inflation moving in the right direction, several months of low inflation indicators would be necessary. He added that the expectation for a slowdown in inflation remains reasonable, and if such a trend materializes, he would support keeping rates steady. Nonetheless, he stressed that the FOMC must be prepared to tighten monetary policy to prevent a repeat of the inflation crisis seen in 2021-2022.
Increased Expectations for July Rate Hike
Following Waller's comments, market expectations for a July rate hike have rapidly increased. According to Bloomberg, the overnight index swap (OIS) market now places the likelihood of a 0.25 percentage point rate increase this month at around 50%, up from below 40% before Waller's remarks.
Ian Lyngen, head of U.S. rate strategy at BMO Capital Markets, noted in a report that investors view the upcoming FOMC meeting on July 28-29 as a potential point for the first rate hike since Kevin Warsh took over as Fed Chair.
The Fed will hold its FOMC meeting on July 28-29. In last month's meeting, the central bank opted to keep rates steady, although some members expressed the need for a rate increase. Half of the 18 policy committee members expect at least one 0.25 percentage point hike this year.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.