Waller: Middle East conflict shifts Fed policy risks

Waller expressed increased concern that higher energy prices may have a lasting effect on inflation, a shift from his previous view on one-time price increases.

He cited recent jobs data validating a pause in rate cuts, as higher energy and commodity prices push up headline inflation.

Consumer Price Index (CPI) inflation rose 0.6 percent in April, with energy prices jumping 3.8 percent.

More broadly, grocery prices were up 0.7 percent, apparel 0.6 percent, and services excluding energy 0.5 percent.

Waller estimated that Personal Consumption Expenditures (PCE) inflation, the FOMC's preferred measure, rose around 3.8 percent over the previous 12 months, the highest in three years and well above the 2 percent target.

Core PCE inflation was up about 3.3 percent year over year, the most in two and a half years.

He highlighted the breadth of price increases, with about half of consumer inflation categories up 3 percent or more this year.

Despite inflation concerns, Waller noted that gross domestic product continues to grow at a solid pace, boosted by business investment related to artificial intelligence (AI) and resilient consumer spending.

Real GDP grew 2.1 percent in 2025 and at a 2 percent rate in the first quarter of 2026.

Retail sales grew 0.5 percent in April, with spending rising at restaurants and bars, suggesting consumers are still active despite falling sentiment.

Manufacturing production also rose solidly in April, driven by high-tech goods investment for AI.

The labor market has achieved a rough balance, with hiring ticking up in March and job openings steady.

The unemployment rate held steady at 4.3 percent in April.

The economy created a net 115,000 jobs in April, averaging 48,000 new jobs over the past three months, a historically low level now consistent with a stable labor market due to near-zero labor force growth.