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Federal Reserve Governor Christopher Waller said the central bank should deliver the additional interest rate increases markets expect or risk damaging its credibility. He is leaning toward an increase in December and indicated that a larger than usual half percentage point move could become appropriate.

Speaking Tuesday in London, Waller said a softer than expected October inflation report would not necessarily dissuade him from supporting a December increase. If inflation readings exceed forecasts, however, he said he would favor “more robust action” from policymakers.

“In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting,” Waller said. “Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take.”

His warning placed the central bank’s credibility at the center of the coming decision. Waller argued that Federal Reserve communications before and during the October meeting had already encouraged markets to expect further increases.

Following through on those expectations matters even if policymakers do not raise rates at every meeting, according to Waller. He said the ultimate delivery of communicated rate increases is more important than maintaining a consecutive schedule.

“When this communication is clear and credible, what really matters is that those hikes are eventually carried out — it is not necessary, for example, to raise rates at consecutive meetings,” he said.

Waller also warned about the consequences if policymakers fail to implement the increases markets have come to expect. In that situation, he said markets would reduce their expectations for rate increases, causing rates to fall immediately and loosening monetary policy in an undesirable manner.

Higher rates “will be needed, sooner rather than later,” Waller said. His remarks made clear that flexibility over the precise meeting date should not become an excuse for delaying the tightening that officials have communicated.

“So, while the precise timing of the hikes doesn’t matter, ensuring that the promised hikes are implemented in a reasonable period of time does,” he said.

The Federal Open Market Committee passed on an increase at its October meeting. In explaining that decision, the committee said “the accumulation of more information” would help determine the proper policy path for bringing inflation down.

That decision was not unanimous. Governor Lisa Cook and Cleveland Fed President Beth Hammack dissented from the committee’s choice to leave rates unchanged in October.

The Bureau of Labor Statistics is scheduled to release the October consumer price index reading Tuesday. The report is among the final inflation releases due before the central bank’s next policy meeting on Dec. 8 and 9.

Since the October decision, multiple Federal Reserve officials have urged patience while continuing to emphasize the need to return inflation to the central bank’s 2% target. Markets were pricing in a greater than 80% probability of a quarter point December increase, according to the CME Group’s FedWatch.

The same market measure showed no chance of a half point increase, creating a clear gap between current pricing and the more forceful option Waller said should be considered if inflation exceeds expectations. His position keeps both the quarter point and half point possibilities in focus ahead of the inflation data.

Chicago Fed President Austan Goolsbee also warned Monday that policymakers must avoid allowing the economy to become excessively hot. The central bank must be careful “because once it gets overheated, it’s extremely painful to get rid of that kind of overheating,” he said.

Waller described the economy as expanding “at a healthy pace.” He also said the labor market “has also been solid,” though it has not been dynamic in the current environment of low hiring and low firing.

His remarks leave the December decision closely tied to inflation readings and the central bank’s prior signals. Waller supports the October pause as long as policymakers follow through within a reasonable period on the additional tightening that markets have anticipated.

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.