Fed’s Waller: Underlying Inflation Remains Too High, Signals Caution on Rate Cuts

Federal Reserve Governor Christopher Waller said on Friday that underlying inflation remains too high, reinforcing expectations that the central bank will keep interest rates elevated for longer than markets had hoped.

Waller’s Stance on Inflation

Speaking at an economic forum in New York, Waller emphasized that recent data on core inflation, which excludes volatile food and energy prices, is still running above the Fed’s 2% target. He noted that while progress has been made, the pace of disinflation has slowed, and the central bank cannot afford to let its guard down.

“The underlying inflation rate is too high to consider cutting rates in the near term,” Waller said, according to prepared remarks. He pointed to persistent price pressures in services and shelter as key contributors, and warned that premature easing could undo the Fed’s credibility in fighting inflation.

Market Reaction and Rate Cut Expectations

Following Waller’s remarks, futures markets trimmed bets on a rate cut at the Federal Reserve’s next policy meeting in March. The probability of a quarter-point cut fell to around 30%, down from 40% a week earlier, according to CME Group’s FedWatch tool.

This is a shift from late 2025, when investors widely expected multiple cuts this year. The Fed’s own projections, released in December, indicated two cuts in 2026, but Waller’s comments suggest that even that path may be optimistic if inflation does not cool further.

Implications for Borrowers and Savers

For consumers, the message is clear: borrowing costs for mortgages, auto loans, and credit cards are likely to stay elevated. The average 30-year fixed mortgage rate, which had dipped to 6.4% in January, could climb back toward 7% if the Fed holds rates steady. Savers, on the other hand, may continue to benefit from higher yields on certificates of deposit and money market accounts.

Businesses, particularly in rate-sensitive sectors like housing and manufacturing, may face continued headwinds. However, a cautious Fed could also help avoid the boom-bust cycle that often follows aggressive easing.

What This Means for the Fed’s Next Moves

Waller’s comments align with a growing consensus among Fed officials that they need more evidence of durable inflation decline before adjusting policy. The upcoming February jobs report and consumer price index, both due in early March, will be critical in shaping the central bank’s decision.

“We need to see consistent, broad-based moderation in prices,” Waller said. “One or two good reports won’t be enough.”

Conclusion

As of this week, the Federal Reserve’s stance remains firmly hawkish, with underlying inflation still above target. Investors and consumers alike should prepare for a longer period of elevated interest rates, unless upcoming data shows a decisive slowdown in price growth.

FAQs

Q1: What is “underlying inflation” and why does the Fed focus on it?
Underlying inflation, often measured by core CPI or PCE, excludes volatile food and energy prices. The Fed uses it to gauge the long-term inflation trend, as it is less distorted by temporary shocks.

Q2: How does this affect my mortgage or car loan?
If the Fed keeps rates high, banks and lenders tend to keep their own interest rates elevated. This means new mortgages and auto loans will remain more expensive than they were in the low-rate era of 2020-2021.

Q3: When could the Fed actually cut rates?
Based on Waller’s remarks and current data, the earliest possible cut might come in the second half of 2026, but only if inflation shows sustained progress toward the 2% target. The March meeting is likely to be a ‘hold’ decision.