Fed's Chris Waller talks interest rates, inflation and recession

Federal Reserve Governor Chris Waller discussed interest rates, inflation and recession fears in prepared remarks Friday.

Speaking at a conference in the Austrian capital of Vienna, Waller said he expects interest rate increases to continue until at least "early next year" as the U.S. central bank works to get inflation closer to its 2% goal.

However, he noted the Fed's "policy path" would depend on forthcoming economic data.

"Six months ago, I would not have thought that we would be where we are today, with inflation so far from our target, after significantly tightening policy with a series of large rate increases and by shrinking the balance sheet," he said.

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The Fed has approved four interest rate increases this year, including two consecutive 75 basis point hikes in June and July. Officials have suggested a third supersized rate hike is likely when the Federal Open Market Committee (FOMC) meets later in September.

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Waller expressed support for "another significant hike" come the FOMC's September meeting.

"After that, the tightening path will continue until we see clear and convincing evidence that inflation is moving meaningfully and persistently down to our 2% target," Waller said.

Waller also said if inflation "does not moderate or rises further this year," he thinks the policy rate "will probably need to move well above" 4%. On the other hand, if inflation "suddenly decelerates," then he thinks the rate may peak "at less than 4%."

Waller noted that inflation for the consumer price index and the personal consumption expenditures index – the Fed's preferred gauge – slowed in July, adding that inflation remains "too elevated."

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"Inflation is widespread, driven by strong demand that has only begun to moderate, by an ongoing lag in labor force participation and by supply chain problems that may be improving in some areas but are still considerable," he said.

During his prepared remarks, Waller also touched on recession fears. Gross domestic product fell the first two quarters of 2022. According to the National Bureau of Economic Research, recessions are technically defined by two back-to-back quarters of negative economic growth and characterized by slowing retail sales, high unemployment, falling income and low or negative GDP growth.

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"The fears of a recession starting in the first half of this year have faded away, and the robust U.S. labor market is giving us the flexibility to be aggressive in our fight against inflation," Waller argued.

He said spending data was "supportive of continued expansion" but also noted that there are signs of moderation in U.S. economic activity, which he said is "what the FOMC is trying to achieve by tightening monetary policy."