Fed Governor Admits Policy Reversal as Inflation Proves Stickier Than Hoped

The Federal Reserve raised its benchmark interest rate by 25 basis points on September 16th, lifting the federal funds target to a range of 3.75-4% and ending nine months of holding rates steady. Speaking on October 8th at the Istanbul Economic Forum, Federal Reserve Governor Christopher Waller laid out the reasoning behind the move. His account amounts to an admission that the central bank reversed course within roughly nine months, moving from rate cuts meant to protect the labor market to rate hikes meant to contain inflation that remains well above target, a shift Waller tried to frame as anything but inept policymaking.

Waller explained that the FOMC had cut rates by a cumulative 75 basis points over three meetings in the second half of 2025, a step he described as “insurance against an economic slowdown” amid rising unemployment and weak job growth. That effort was complicated by a government shutdown beginning October 1st, 2025, which disrupted the flow of official economic data policymakers rely on. Waller said inflation progress “stalled” in the first half of 2026, undone in part by the Iran war that pushed energy prices sharply higher.

Three forces, according to Waller, reignited inflation concerns: persistently high oil prices tied to the ongoing Middle East conflict, with low inventories and damaged infrastructure threatening to keep prices elevated through 2027; a surge in artificial intelligence investment pushing up high-tech consumer prices; and renewed trade tensions raising the prospect of new tariffs. An unexpectedly hot Consumer Price Index reading for August, released just before the September meeting, reinforced the case for tightening, though Waller maintained the decision rested on a “preponderance of evidence” rather than one report. Revised data later showed core PCE (Personal Consumption Expenditures) inflation rose 0.25 percent that month, pushing the 12-month rate to 3 percent, a full point above the Fed’s target.

Despite this, Waller called the labor market “stable” and said he is “not greatly concerned” that tighter policy will damage the economy, a notable shift from the concerns that drove last year’s cuts, echoing other officials who have conceded persistent inflation failures. The Fed’s Summary of Economic Projections (SEP) from September shows 16 of 18 FOMC participants anticipate at least one more hike this year, with four expecting two, a stance some have compared to ignoring inflation shocks that can no longer be dismissed. Futures markets price an 85 percent chance of a December hike and nearly 80 percent odds of at least two more by March 2027. Waller described the Fed’s approach as a deliberate “signaling” exercise, projecting a general direction while leaving the pace of future moves undecided, a tactic critics have dismissed as the Fed’s hike being a bluff.

Twelve-month core PCE inflation has held between roughly 2.5 and 3 percent since spring 2024, meaning the country is approaching five and a half years above the Fed’s 2 percent target. Gold, meanwhile, traded at $4,123 per ounce the same day Waller spoke, continuing its bull market momentum and trading near record levels.