DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.

Federal Reserve Governor Christopher Waller signaled Thursday that he is prepared to support leaving interest rates unchanged at the central bank’s September meeting, provided forthcoming inflation reports do not deliver an unwelcome surprise.

His remarks immediately cooled market expectations for another increase in borrowing costs.

Waller’s position appears more patient than the message delivered last week by Fed Chairman Kevin Warsh.

While Warsh emphasized the persistence of price pressures, Waller argued that recent data offer credible evidence that inflation is beginning to lose momentum.

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The governor acknowledged that inflation remains “meaningfully above” the Federal Reserve’s 2% target.

Even so, he said current trends “suggest we are finally seeing some signs of disinflation.”

“If this continues in the data due over the next two weeks, I would be inclined to support holding the target for the federal funds rate at its current setting,” Waller said in remarks for a Reuters interview.

That conditional support places considerable importance on the next round of federal inflation figures.

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Financial markets reacted quickly to the prospect of a September pause. According to the CME Group’s FedWatch gauge, the market implied probability of a rate increase at the September 15 and 16 meeting fell to 48.4%, roughly 15 percentage points below the level recorded Wednesday.

Waller used a cultural reference to make the case for patience rather than another immediate dose of monetary restraint.

“I’m going to paraphrase John Lennon here: Give disinflation a chance. We can wait one meeting,” Waller said.

He also questioned whether a quarter point increase now would materially change the inflation outlook.

“What’s the cost of waiting one meeting? Hiking 25 basis points, one meeting right now, is not going to bring the CPI down to 2%.”

Still, Waller did not offer markets an unconditional guarantee that rates will remain steady. He made clear that a renewed acceleration in inflation could persuade him to support tighter policy before the Federal Open Market Committee gathers.

“I judge that policy is currently only slightly restricting aggregate demand, and it may not take much acceleration in inflation to nudge me into supporting tighter policy,” Waller said.

His assessment suggests the current rate setting has limited room to absorb a fresh inflation shock.

“If there is evidence that progress toward 2% inflation reversed in August, a small adjustment in our stance would help ensure that it resumes,” he added. That warning keeps a September increase firmly on the table, even if Waller presently favors waiting.

The central bank will receive two major inflation releases before the meeting, with the Bureau of Labor Statistics scheduled to publish the consumer price index and producer price index next week.

Both reports heavily influence the Commerce Department’s personal consumption expenditures price index, which Fed officials treat as their principal inflation benchmark.

Waller’s remarks arrived less than a week after Warsh offered a more hawkish interpretation at the Fed’s annual symposium in Jackson Hole, Wyoming.

The chairman said recent softer monthly readings “do not tell me that underlying trends have meaningfully improved,” adding that if inflation fails to cooperate, “we have work to do.”

Markets interpreted Warsh’s comments as a warning that another rate increase could be approaching.

Although his language was broadly consistent with earlier statements, investors rapidly raised the probability of action at the September gathering before Waller’s remarks reversed part of that move.

Headline inflation stood at 3.7% in July, while core inflation was 3.3%, both remaining well above the central bank’s formal objective.

Waller nevertheless argued that the underlying picture is “better than the core numbers suggest” and that annual readings “are not the best guide for where inflation is today.”

He pointed to the shorter term trend in the Fed’s preferred measure, noting that the three month inflation rate declined from 4.76% in February to 3.05% currently.

“That is a considerable improvement, and the speed of this downward trajectory is encouraging,” Waller said.

The governor also argued that certain “nonmarket services prices” may be overstating current inflation because those figures are estimated rather than directly observed.

In addition, expected revisions to the Bureau of Economic Analysis methodology for calculating the personal consumption expenditures index could lower readings previously reported for this year.

For investors, the next inflation reports now carry even greater weight across stocks, bonds, precious metals and other rate sensitive assets.

A benign set of numbers could secure a September pause, while a hotter surprise could quickly revive expectations for tighter money and renewed market volatility.

DISCLAIMER: GoldInvestors.news is not a registered investment, legal or tax advisor or broker/dealer. All investment/financial opinions expressed by GoldInvestors.news are from the personal research and experience of the owner of the site and are intended as educational material. Although best efforts are made to ensure that all information is accurate and up to date, occasionally unintended errors and misprints may occur.