Federal Reserve Governor Christopher Waller's dovish-leaning remarks on Sept. 3 cut market-implied odds of a September rate hike by roughly 12 percentage points to 54.6 percent, weakening the dollar and lifting the euro as traders repriced Fed policy expectations.
Federal Reserve Governor Christopher Waller's openness to holding rates steady at the September meeting pared market-implied odds of a hike to 54.6 percent, sending the euro higher against a softer dollar. Speaking in a Reuters NEXT Newsmaker interview on Sept. 3, Waller said he would support leaving the federal funds rate unchanged at the upcoming Federal Open Market Committee meeting, provided incoming inflation data continues to show disinflation.
"I would support holding rates steady if the data continues to show the disinflationary trend we've seen," Waller said, according to the interview. His remarks offered a counterweight to Fed Chair Kevin Warsh, who had recently pushed markets in the opposite direction with comments that lifted near-term rate-hike expectations.
The repricing was immediate. The CME FedWatch tool registered a roughly 12-percentage-point drop in the probability of a rate increase, to 54.6 percent, from where odds stood before the interview. Bond yields, which had been climbing on hawkish bets, stabilized across the curve, while US stock futures climbed modestly and European equity futures also gained on the recalibrated expectations. The euro strengthened against the dollar as traders pared back dollar-long positioning built on the prospect of tighter US policy.
The stakes for the September FOMC meeting are high because the two Fed voices are reading similar data through different lenses. Waller pointed to an "encouraging" trend: the three-month annualized inflation rate fell to 3.05 percent in the latest reading from 4.76 percent in February. Yet headline inflation stood at 3.7 percent as of July, with core at 3.3 percent, both "meaningfully above" the Fed's 2 percent target, as Waller acknowledged. That gap means the direction of travel, not just the level, will decide whether the committee holds or hikes.
External pressures complicate the calculus. Tariffs, energy prices, and geopolitical tensions each carry the potential to push inflation higher regardless of domestic demand, giving Warsh's more hawkish framing continued weight. A 54.6 percent probability still leaves the market pricing a slightly better-than-even chance that rates go higher.
The next round of inflation data will be decisive. If the three-month annualized measure holds near 3 percent, Waller's case for a pause strengthens and the dollar could extend its slide, supporting risk assets and emerging-market currencies. If price pressures reaccelerate, Warsh's emphasis on the still-elevated level of inflation is likely to win out, reviving dollar strength and pressuring the euro. With the gap between the 3.05 percent three-month reading and the 2 percent target still wide, traders are watching the data calendar closely for the signal that tips the September decision.
This article is for informational purposes only and does not constitute investment advice.
