Federal Reserve’s Waller delivers hawkish speech, hints at rate hikes if inflation stalls

Federal Reserve Governor Christopher Waller delivered a hawkish speech in Frankfurt on May 22, reversing his earlier dovish stance on monetary policy. Waller argued that the Fed’s language suggesting a bias toward rate cuts should be removed, emphasizing that inflation—currently at 3.8% as measured by the Personal Consumption Expenditures index—remains a primary concern. Waller cited energy price shocks from the ongoing Iran conflict and lingering tariff effects as key factors keeping inflation elevated. While he did not explicitly call for an immediate rate hike, he stated that the likelihood of a rate cut now equals the chance of a rate hike, marking a significant shift in policy outlook. This conditional stance left markets recalibrating expectations, with futures pricing in a 67% probability of a 25-basis-point rate hike by the October Federal Open Market Committee meeting. Bitcoin reacted sharply to Waller’s speech, dropping below $77,000 to around $76,700 as higher interest rates increase the cost of holding non-yielding assets. The speech also underscored concerns about inflation expectations becoming unanchored, which could force the Fed into aggressive action regardless of economic growth consequences. Waller’s remarks reflect broader challenges in addressing supply-side inflation pressures, including geopolitical disruptions and trade-related costs. While his conditional approach leaves room for reversal, the data between now and October will determine whether the Fed pivots toward tighter monetary policy or maintains a more cautious stance.