Waller says inflation now poses biggest risk to the Fed

Christopher J. Waller said in Rome that the biggest risk facing the Federal Reserve was now inflation, not a weakening labor market. At a conference sponsored by the Bank of Italy for the research network initiated by the European System of Central Banks, Waller said the labor market looked stable while inflation had “been taking off,” a sharp reversal from a year ago when he favored rate cuts because hiring had looked softer.

The next major inflation reading lands on July 14, when the government will release the June consumer price index at 8:30 a.m. ET. That report will arrive just two weeks before the Federal Open Market Committee meets on July 28 and 29, with the rate announcement due July 29 at 2:00 p.m. ET and Chair Kevin Warsh scheduled to hold a press conference at 2:30 p.m. ET. Fed projections after the June 16-17 meeting still showed median 2026 PCE inflation at 3.6 percent, well above the central bank’s 2 percent goal, while the median projected federal funds rate for year-end 2026 stood at 3.8 percent.

Waller’s comments came after the Bureau of Labor Statistics said June payrolls rose by only 57,000 and the unemployment rate was 4.2 percent. The labor force participation rate slipped to 61.5 percent from 61.8 percent in May, and oil prices had fallen back to around $70 a barrel, roughly where they stood before the U.S.-backed war with Iran began, which could help restrain headline inflation if the decline holds.

In early 2022, Waller said the ratio of job vacancies to unemployed workers was 2, a level he described as unprecedented. Instead of workers being laid off, employers cut back on vacancies, which kept unemployment from rising sharply even as the Fed tightened aggressively. Waller said the risks had “completely flipped around,” with inflation now the more immediate threat.

Nine Fed officials projected the need for tighter policy in 2026.