Today, Federal Reserve Governor Christopher Waller delivered remarks in New York titled "Monetary Policy at a Crossroads," outlining the challenges facing policymakers as they navigate stubborn inflation and an increasingly uncertain economic outlook.
Waller said the Federal Reserve remains concerned about persistently elevated core inflation, which excludes the volatile food and energy categories and is widely viewed as a better indicator of underlying price pressures. While the Fed's inflation target remains 2%, core inflation stood at 3.4% in May, well above that goal.
As a result, Waller warned that policymakers may soon need to act to prevent a repeat of the inflation surge experienced in 2021 and 2022.
"As I said in a May 22 speech, I am cognizant of the mistake we made in 2021 by not responding sooner to the high inflation we observed, and I am determined to avoid repeating it. But the desire to avoid past mistakes is often the author of new ones."
At the same time, Waller cautioned against overreacting. Unlike in 2022, the labor market has cooled, inflation expectations remain relatively well anchored, and job openings have declined from their post-pandemic highs. Raising interest rates too aggressively now could slow hiring, push up unemployment, and increase the risk of recession.
As Waller explained:
"While the main effect of higher rates then was to reduce vacancies—rather than employment—there is a much greater risk now that tighter monetary policy could drive up unemployment and even risk a recession."
Waller identified three factors that may be keeping core inflation elevated: tariffs, energy prices, and artificial intelligence.
Regarding tariffs, he said they have contributed to higher prices but appear to have had largely a one-time effect. Unless tariff policy changes significantly, they are unlikely to generate another sustained round of inflation.
Although energy prices are excluded from the core inflation measure, Waller noted that higher oil prices can still spill over into the broader economy by raising production and transportation costs. He expressed hope that continued efforts to ease geopolitical tensions would help stabilize energy markets.
Finally, Waller pointed to surging demand for electronic components used in AI infrastructure. The rapid expansion of AI data centers has boosted demand for semiconductors and memory chips, contributing to higher prices across parts of the technology supply chain.
Overall, Waller argued that the Federal Reserve faces a delicate balancing act. Core inflation remains uncomfortably high, but tightening monetary policy too quickly could tip an already slowing economy into recession. He emphasized that the Fed will continue to rely on incoming economic data—particularly tomorrow's Consumer Price Index (CPI) report—to determine whether further action is necessary.
If inflation proves more persistent than expected, Waller made clear that the Fed cannot simply wait and hope it fades on its own.
"When inflation is well above its target and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation. Sternly staring at inflation until it melts before our withering gaze is not an option."
In short, Waller signaled that additional interest-rate increases remain a real possibility if inflation fails to move convincingly back toward the Federal Reserve's 2% target.
