Encouraging labor market data supported the pause in lowering the central bank rate, but higher energy prices from the protracted Iran conflict could have a lasting effect on inflation, which is a larger concern for Federal Reserve Governor Christopher Waller.
The labor market appears to be stabilizing, and the unemployment rate remains fairly low, Waller said, speaking at the European Central Bank in Frankfurt, Germany, in remarks reported by the Federal Reserve.
I am going to need to see improvement on inflation or a significant deterioration in the labor market before I would consider reducing the policy rate.
Higher energy and commodity prices are intensifying headline inflation and prices for other goods, however, which means inflation is headed is not headed in the right direction.
"Based on this recent data," Waller said. "I would support removing the "easing bias" language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase."
Consumers have been spending, Waller notes, as retail sales grew 0.5% in April, partly because of surge in spending at gas stations.
AAA reported that gas prices ended April at a national average of $4.30, after seeing a 27-cent hike in one week. The surge reflected oil prices spiking to above $100 per barrel, when there was little indication that the Strait of Hormuz would reopen, the organization said.
But Americans have been opening their wallets in discretionary areas, too, like in restaurants and bars, and although the Michigan Survey registered lower sentiment, they are still opening their wallets, he said.
The stable employment outlook
As for the labor and employment picture, hiring increased slightly in March, reaching its highest level in more than a year, Waller said. Also, April's unemployment reading held steady at 4.3%, which is close to its estimate of its long-run level.
That month, the economy created a net 115,000 jobs in April and averaged 48,000 new jobs over the past three months, Waller said, citing the Quarterly Census of Employment and Wages, Current Employment Statistics, from the Bureau of Labor Statistics.
"With regard to future rate cuts, I am going to need to see improvement on inflation or a significant deterioration in the labor market before I would consider reducing the policy rate," Waller said.
He added that he believes inflation will largely be determined by the length of the conflict involving Iran, and that he is prepared to be patient and watch how it unfolds, while holding Fed policy at the current restrictive setting.
"If I believe inflation expectations start to become unanchored, I would not hesitate to support an increase in the target range for the federal funds rate," Waller said. "But at this point that action is premature."
