The prospects that the Federal Reserve will deliver a second straight interest rate increase this month dimmed further on Thursday after a top official joined other central bank policymakers in suggesting that they have flexibility in determining the timing of subsequent moves.
Christopher J. Waller, a Fed governor, emphasized in a speech on Thursday that the Fed still had more work to do to bring inflation back to its 2 percent target after nearly six years of overshooting it. Mr. Waller endorsed “additional hikes” to support a speedier retreat to that level, but he did not convey an immediate urgency.
“If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal,” Mr. Waller said in a speech at an event in Istanbul. “But there is some flexibility about when those hikes will occur.”
He added that further moves to raise borrowing costs “do not need to come at consecutive meetings, but they should be in place in an acceptable period of time.”
Mr. Waller’s comments solidify a reset in expectations about when the Fed will next raise rates. Just two weeks ago, financial markets were putting 70 percent odds on a second consecutive rate increase at the Fed’s meeting at the end of October, just days before the midterm elections.
But those expectations plummeted to around 20 percent last week after two speeches by members of the central bank’s three-person policy-steering group led by Kevin M. Warsh, the Fed’s chairman. Two members of that “troika” — John C. Williams, the president of the Federal Reserve Bank of New York, and Philip N. Jefferson, the Fed’s vice chair — suggested that the central bank could take its time before raising rates again after a unanimous vote to do so in September. That view was buttressed on Friday when September’s jobs report showed slowing monthly growth.
Mr. Waller explained on Thursday why, after supporting the Fed’s decision to hold rates steady over the spring and summer, he eventually backed an increase. By the time the policy-setting committee met in mid-September, he said, there was a “preponderance of evidence over several months that the risks for monetary policy had shifted.” That included signs that the labor market had stabilized as well as a proliferation of inflation risks.
Those risks include the extended war with Iran, which has raised prices for oil and other goods. Mr. Waller also cited emerging price pressures from the surge in spending to expand artificial intelligence capabilities as well as the prospect that President Trump may impose new tariffs.
“When the first inflation reading for August came in hot just before the F.O.M.C.’s September meeting, it was impossible to deny that inflation was still too high and not making sufficient progress toward our target,” Mr. Waller said.
He said inflation remained his top concern, especially the possibility that consumers begin to question the central bank’s resolve to get back to the 2 percent target.
“With evidence that economic activity is strengthening in the second half of this year, I am not greatly concerned that tighter monetary policy threatens a damaging slowdown in the economy,” he added.
Mr. Waller did not articulate how he would determine the timing of subsequent rate increases, but he emphasized the importance of the Fed’s communicating clearly about its thinking. That approach stands in stark contrast to Mr. Warsh’s preference for the central bank to be more circumspect in signaling about the future. The chairman has said that doing so ties the Fed’s hands and makes it harder for officials to pivot if the economic backdrop calls for a different response. He has also rejected quarterly forecasts that officials provide about their thinking on the path for policy and the outlook for inflation, growth and unemployment.
These projections are just one aspect of the Fed’s communication strategy that Mr. Warsh has directed a group of external advisers to look into as he seeks to make good on his promise to enact “regime change” at the central bank.
But according to Mr. Waller, opting against sending a clear signal about the policy path has downsides. It could “surprise markets and create volatility,” he said.
It also could make the Fed’s job of influencing the economy harder, Mr. Waller added.
“The point is that if too few or too many hikes are priced in, the change in financial conditions would mean too little or too much of an effect on economic activity,” he said.
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