Waller: Inflation, Middle East conflict shift Fed policy risks

Federal Reserve Governor Christopher J Waller has shifted his monetary policy stance, now supporting a pause in rate cuts and the removal of the "easing bias" from the FOMC statement.

This change reflects growing concerns that the Middle East conflict's energy shock may have a lasting effect on inflation, unlike previous tariff-induced price increases.

Recent data shows headline CPI inflation up 0.6 percent last month, driven by a 3.8 percent jump in energy prices and broad increases across groceries and services.

Waller estimates PCE inflation, the FOMC's preferred measure, rose around 3.8 percent over the past 12 months, the highest in three years and well above the 2 percent target.

Core PCE inflation also increased to 3.3 percent year-over-year.

His current policy position is to hold rates steady for the near term, not ruling out future rate hikes if inflation persists or expectations become unanchored.

Economic activity continues to grow at a solid pace, driven by AI-related business investment and resilient consumer spending.

Real GDP grew at a 2 percent rate in Q1 2026.

Retail sales rose 0.5 percent in April, indicating consumer resilience despite low sentiment, though the saving rate hit a four-year low of 3.6 percent in March.

The labor market has reached a rough balance; April's unemployment rate held steady at 4.3 percent.

Job creation averaged 48,000 new jobs over three months, consistent with a stable labor market.

This stability means labor market concerns have receded as the dominant policy driver.