CPI sets the direction tonight! Waller turns hawkish—July rate-hike odds jump to 50% overnight

On Monday, remarks by officials and market pricing both heated up around whether the Federal Reserve could tighten policy soon. Federal Reserve Governor Christopher Waller said that if core inflation continues to show broad signals of price pressure, the Federal Open Market Committee (FOMC) would need to consider rate hikes in the near term.

He made the comments in prepared remarks for an event in New York. The U.S. Bureau of Labor Statistics is scheduled to release the latest Consumer Price Index (CPI) data on Tuesday, and Waller said bluntly: “If this week we see core inflation data running hot again, then the FOMC will need to consider tightening monetary policy in the near term.”

Waller also noted that the U.S. economy is currently performing well, the labor market looks stable, and consumer demand remains resilient. However, he believes inflation pressure is building under the combined push of tariffs, energy prices, and the construction of AI infrastructure—putting monetary policy at a “crossroads.”

He added: “No matter how you analyze it, or what metrics you use, inflation this year is rising. As of now, I’m concerned about the elevated trajectory of core inflation.” According to him, the Federal Reserve’s preferred inflation gauge—core Personal Consumption Expenditures (PCE) excluding food and energy—rose to 3.4% over the one-year period ending this May.

Waller emphasized that this measure has been trending upward since January, when the United States and Iran had not yet gone to war, and it has “been rising steadily” since then. He said that if the next core inflation readings come in lower, he would be “very happy,” but given that inflation has already moved higher in the first half of this year, it will be necessary to see several consecutive months of lower data to confirm inflation is heading in the right direction again.

If that happens, Waller said he would support holding steady and keeping rates unchanged. However, he also warned that the Fed needs to avoid repeating mistakes from the 2021 and 2022 pandemic-driven inflation shock period, when the FOMC was criticized for moving too slowly with rate hikes.

In his view, the difference from then is that the labor market has not yet shown signs of overheating, and inflation expectations are still well anchored. Even so, if core inflation continues to rise, it could still mean that price pressures are spreading into broader parts of the economy. “The FOMC must be prepared to tighten monetary policy to prevent a repeat of the 2021 to 2022 inflation episode.” Waller said.

As scheduled, Fed Chair Kevin Warsh will testify before Congress this week. This means that as the latest inflation data is released, the market will also be waiting for his public remarks to further judge the policy path.

According to a Bloomberg survey of economists, the June CPI data to be released on Tuesday is expected to cool from 4.2% in May to 3.8%, while core CPI is expected to remain at 2.9%. Both indicators are still expected to be significantly above the Fed’s 2% target. In addition, a new round of mutual strikes between the U.S. and Iran has pushed up energy prices, even though current oil prices remain well below the peaks seen in March and April.

Markets bet on a July move—short-dated Treasury yields jump higher
With Middle East developments lifting oil prices and Waller issuing hawkish signals, traders on Monday further increased their bets on a 25-basis-point rate hike by the Fed in July. Money-market pricing shows that after the U.S. launched a new round of strikes on Iran, the probability of a July rate hike is close to 50%, while earlier in the day the probability was still below 40%.

The rapid shift in expectations is reflected in the Treasury market. The two-year Treasury yield—most sensitive to Fed policy—rose as much as 8 basis points to 4.29% at one point, the highest since February 2025; the five-year yield also touched the same-period high of 4.37%; the benchmark 10-year Treasury yield rose 6 basis points to as high as 4.62%, the highest since May.

This round of yield gains came before this week’s CPI and Producer Price Index (PPI) data and before Warsh’s testimony to Congress. Because this information will land before the Fed’s next meeting, the market sees it as a key variable in determining the near-term policy direction. Even if Tuesday’s inflation data may ease at the margin, the market is still strengthening its expectations for tightening.

Molly Brooks, a U.S. rates strategist at TD Securities, said: “The market pushed up short-term rate-hike expectations based on Waller’s remarks. That makes Tuesday’s CPI data even more important—and therefore more volatile.”

Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, said: “Investors are still focused on the FOMC meeting on July 29, viewing it as potentially the timing for Warsh’s first rate hike. The combination of Tuesday’s CPI index and Warsh’s remarks will push probabilities in one direction or another.”

Alyce Andres, a Bloomberg macro strategist, noted: “Waller laid out the Fed’s reaction function this week, reducing the Fed uncertainty premium embedded in Treasury yields, even though his remarks were hawkish.”

Geopolitical risk is also amplifying the market’s vigilance about inflation. Brent crude rose as much as 9.9% on Monday. After Trump said the U.S. is “restoring” its blockade on Iranian vessels, short-dated Treasury yields climbed quickly higher, reflecting investors increasingly believing that, with a global energy price rebound and the U.S. economy still showing resilience, the Fed may need to hike faster to rein in price pressures.

Even so, despite market pricing indicating rising rate-hike risk, many investors’ current base-case scenario is that the Fed will not tighten monetary policy this year#沃什听证会撞上CPI