Waller flags core inflation risk, policy path unclear
Federal Reserve Governor Christopher J. Waller stated that U.S. core inflation is at a crossroads, with its future trajectory uncertain. He highlighted the implications for monetary policy, emphasizing the need to avoid past mistakes while preventing overtightening.
Inflation's upward trajectory
Federal Reserve Governor Christopher J. Waller expressed concern that U.S. core inflation is at a crossroads, having steadily risen from 3 percent in December 2025 to 3.4 percent in May 2026.
He noted that headline PCE inflation reached 4.1 percent over the 12 months through May.
Waller highlighted the risk of repeating the 2021 mistake of not responding sooner to high inflation, stating that if the upward trend in core inflation continues, it will be challenging to return to the FOMC's 2 percent goal with the current policy setting.
He identified tariffs, energy prices from the Middle East conflict, and spillovers from AI-related demand as key factors driving this inflationary pressure.
Waller stressed the need for the FOMC to be ready to tighten monetary policy but also cautioned against overtightening and risking a recession.
Resilient economy, balanced labor
Despite inflationary pressures, Waller described the real side of the economy as being in good shape, with resilient household and business spending.
He noted continued strong investment in artificial intelligence.
The labor market, while showing some recent noise, is stable and balanced, with an average of 111,000 jobs created per month over the past three months.
This pace reflects strong labor demand relative to supply.
Waller emphasized that the labor market is not as tight as in 2022, with wage growth around 3.5 percent, reducing the risk of tighter policy driving up unemployment.
Navigating a delicate balance
Waller's speech underscores the Fed's difficult position, balancing persistent inflation with growth risks.
His emphasis on core inflation suggests a bias towards tightening if data doesn't improve.
This cautious but firm stance reflects the current uncertainty facing policymakers.
Source: Waller, Monetary Policy at a Crossroads
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