Federal Reserve Governor Christopher Waller just gave markets something they hadn’t heard in a while: a reason to exhale. Speaking during a Reuters NEXT Newsmaker interview on September 3, Waller said he’d support keeping the federal funds rate unchanged at the upcoming FOMC meeting, provided incoming inflation data continues to show disinflation. US stock futures climbed modestly on the remarks, and bond yields, which had been on a hawkish tear, finally stabilized.
The timing matters. Fed Chair Kevin Warsh had recently pushed markets in the opposite direction with comments that lifted near-term rate hike expectations. Waller’s more measured tone offered a counterweight, and traders moved fast to reprice accordingly.
The inflation picture Waller is watching
Waller didn’t pretend inflation is solved. He acknowledged that it remains “meaningfully above” the Fed’s 2% target. Headline inflation sat at 3.7% as of July, with core inflation at 3.3%. Those are not victory-lap numbers.
But he pointed to a trend that he called “encouraging.” The three-month annualized inflation rate dropped from 4.76% in February to 3.05%. That’s a meaningful deceleration in a relatively short window, and it’s the kind of momentum the Fed watches closely when deciding whether to tighten further or sit tight.
Markets respond with a sigh of relief
The most immediate reaction showed up in rate expectations. The CME FedWatch tool, which tracks market-implied probabilities for Fed policy moves, registered a drop in the likelihood of a rate hike to 54.6%. That represents roughly a 12-percentage-point decline from where odds stood before Waller’s interview.
The bond market responded to Waller’s comments by pausing its recent selloff. Yields stabilized across the curve, which in turn lifted risk appetite in equities. European stock futures also gained during the session, riding the same wave of recalibrated expectations.
What’s driving the broader backdrop
Waller’s comments don’t exist in a vacuum. The Fed’s calculus is being complicated by a range of external pressures, including tariffs, energy prices, and geopolitical tensions. Each of those variables has the potential to push inflation higher regardless of what domestic demand is doing.
The current dynamic is also shaped by the internal tension within the Fed itself. Warsh and Waller appear to be reading similar data through different lenses, with Warsh emphasizing the still-elevated level of inflation and Waller focusing on the direction of travel.
What traders and investors should watch
A 54.6% probability of a hike still means the market sees a slightly better-than-even chance that rates go higher. The next round of inflation data will be critical in determining whether Waller’s “encouraging” trend holds or whether Warsh’s more hawkish framing proves prescient.
The gap between 3.05% on the three-month measure and the 2% target also means the Fed has a long way to go before anyone starts talking about easing.