Fed's Former Vice Chair: Rate Hike Now the Default, Waller's Remarks Reverse Fed's Logic

"The Fed whisperer" Nick Timiraos reported that Fed Chair Waller has eased some concerns over his inflation-fighting strategy, but also set the stage for a bigger test three weeks away. If the Fed raises rates, it could anger the White House weeks before the midterm elections. If it holds steady, it could reignite the very concerns his speech sought to calm.

Two points from Waller's Friday remarks particularly suggest a rate hike next month: first, Waller found it difficult to characterize current financial conditions as restrictive. Second, the better summer inflation data did not convince him that the underlying trend was improving. Before Friday, the default stance was to hold unless the data justified action.

Former Fed Vice Chair Kohn said Waller's speech flipped the logic. "He has changed the presumption — now it's hike unless the data show it's not necessary." That means the final decision will hinge on developments before the September meeting, especially the August CPI report due September 11. Kohn said if the data show no need to act, the Fed should not hike; if the data remain firm, it would undermine the argument that inflation is returning to the Fed's 2% target.