Fed Governor Waller turns hawkish! Supports removing "accommodative bias" and warns that further rate hikes are not off the table if inflation spirals out of control.

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Is the door to rate cuts about to close? Christopher J. Waller, a key Governor of the Fed, delivered a latest speech today (22nd), bluntly stating that the energy shock caused by the Middle East conflict has pushed U.S. inflation in the "wrong direction." He not only publicly supported removing the "easing bias" from policy statements but also issued a rare warning: if there are signs of inflation expectations becoming unanchored, he would not rule out the option of "restarting rate hikes." (Previous coverage: New rules for Fed master accounts released! Crypto firms are one step away from connecting to the Fed clearing system) (Background: Fed releases April FOMC meeting minutes: Resurgent inflation may force rates to stay higher for longer, restarting rate hikes not ruled out!) Christopher J. Waller delivered a speech titled "Policy Risks Have Changed" in Frankfurt, Germany, today (May 22, 2026), dropping a bombshell on the market. The monetary policy stance of the Fed is undergoing a critical shift. In his speech, Governor Waller clearly pointed out that as the military conflict in the Middle East drags on, the impact of soaring energy prices on the U.S. economy can no longer be ignored. He admitted that the focus of policy has shifted from concerns about the labor market to comprehensively preventing an inflation resurgence. Waller expressed strong concern over recent inflation data. He noted that the rise in energy prices triggered by the Middle East conflict is gradually seeping into other goods and services. According to his estimates, the Fed's preferred indicator — the Personal Consumption Expenditures (PCE) price index — is expected to reach a year-on-year growth rate of 3.8% in April, hitting a three-year high; meanwhile, core PCE, which excludes food and energy, will reach 3.3% (the highest in two and a half years). Furthermore, prices in as many as half of all consumer categories have risen by more than 3%, a historically rare instance of broad-based price increases. Waller stated gravely: "Inflation is not moving in the right direction... The longer the energy price shock persists, the greater the risk that these increases will spread to the prices of other goods and services." Faced with the harsh reality of heating inflation, Waller's policy stance has seen a significant hawkish turn. Regarding the future path of monetary policy, he proposed three core points: - Removing hints of rate cuts: Based on recent data, Waller expressed support for removing the "easing bias" language from the FOMC policy statement to clearly communicate to the market that "the probability of future rate cuts is no higher than that of rate hikes." - Maintaining the status quo in the short term: Despite persistently high inflation, he believes that the current 4.3% unemployment rate indicates that the labor market has reached a stable equilibrium (and is not overheating). At the current restrictive interest rate level, he supports "standing pat" for now to observe the developments in the Middle East. - Not ruling out restarting rate hikes: This is the point the market is most wary of. Waller explicitly warned that if inflation fails to cool down, especially if there are signs of "inflation expectations" becoming unanchored, he would not hesitate to support raising the target range for the federal funds rate. Interestingly, Waller used the concept of "Bayesian updating" from probability theory in his speech to explain public psychology. He pointed out that while last year's "tariff shock" and this year's "oil shock" might be temporary when viewed in isolation, when the public faces a continuous series of positive price shocks, they are highly likely to change their psychological expectations for future inflation, which in turn makes inflation more stubborn. Waller concluded that U.S. inflation has failed to meet the 2% target for over five consecutive years, which is an "unpleasant arithmetic" that policymakers must face. Until there is substantial improvement in inflation or a significant deterioration in the labor market, the door to rate cuts will remain firmly closed for the time being.

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