Federal Reserve Governor Christopher Waller signaled on Thursday that he is inclined to keep interest rates unchanged at the Fed’s September 15-16 meeting, contingent on upcoming inflation data. His position contrasts somewhat with recent comments from Fed Chairman Kevin Warsh, who expressed skepticism about meaningful improvement in inflation trends. Waller highlighted that while inflation remains above the Fed’s 2% target, recent data are showing encouraging signs of disinflation, especially as tariffs and high energy costs have had limited broader economic impacts.

Waller emphasized a cautious approach, suggesting that waiting one more meeting before another rate hike would not jeopardize inflation goals, underscoring the idea that a 25 basis point increase now would not rapidly reduce the Consumer Price Index (CPI) to the 2% target. His stance led to a notable shift in market expectations, with the probability of a rate hike in September dropping sharply to about 48.4%, according to the CME Group’s FedWatch tool. Despite this, Waller maintained he would be ready to support tighter policy if inflation readings worsen between now and the meeting.

The governor pointed out that headline inflation in July was at 3.7%, with core inflation at 3.3%, but he argued that these annual figures might overstate current inflation trends. He stressed improvements shown by the Fed’s preferred inflation gauge, which has fallen significantly over recent months, and noted that some inflation components, such as nonmarket services prices, might be skewing numbers higher. Additionally, upcoming methodological changes by the Bureau of Economic Analysis are expected to revise inflation metrics downward.

Waller’s comments come amid divergent views within the Fed on the inflation outlook, following Warsh’s recent speech at the Jackson Hole symposium where he warned that subdued monthly inflation reports did not signify underlying progress. Waller’s perspective offers a more optimistic take on inflation trajectories and signals potential stability in monetary policy at least in the short term, pending the critical inflation data expected next week from the consumer and producer price indexes.