Waller's hold signal lifts stocks, easing September hike odds to 50-50

U.S. stocks climbed Wednesday as Fed Governor Christopher Waller backed a September hold, trimming hike odds to about 50-50 and pulling yields lower.

"A hike in September is possible if the August CPI and PPI come in firmer, but we continue to expect that core CPI and PCE inflation will print around 0.2% in August and that the FOMC will remain on hold," Jan Hatzius, chief economist at Goldman Sachs, said.

Waller's remarks, delivered at a Reuters interview in Washington, struck a more data-conditional tone than the hawkish framing Fed Chair Kevin Warsh gave at Jackson Hole on Aug. 28, which had pushed market-implied odds of a September increase to roughly 60-66 percent from about 35 percent. Treasury yields dropped to session lows and S&P 500 futures moved higher after Waller said he would support holding the federal funds rate at its current 3.50-3.75 percent target if disinflation continues. The dollar index fell 0.24 percent to 99.43, while the yen strengthened to 159.77 per dollar.

The repricing leaves the Sept. 15-16 Federal Open Market Committee meeting hinging on the August consumer price index and the employment report due Sept. 4, with a Reuters survey forecasting 55,000 nonfarm payrolls added. Waller said his vote would be "heavily influenced" by the August CPI print.

Oil Prices Cap the Relief Rally

The advance unfolded even as oil climbed on Middle East tensions, with the de facto blockade of the Strait of Hormuz keeping upward pressure on energy costs. Among the S&P 500's 11 sectors, energy led gains, with Halliburton and Valero Energy each rising 1.9 percent, while utility stocks lagged after California power giant PG&E plunged 20.1 percent on wildfire-liability legislation.

Waller's comments took the sting out of that commodity headwind by suppressing Treasury yields, which had climbed after Warsh's speech pushed the 10-year yield into the 4.76 percent range. The governor argued that headline and core annual inflation figures paint a misleadingly grim picture, pointing to the three-month core rate, which has fallen to 3.05 percent through July from 4.76 percent in February. Twelve-month core PCE still stands at 3.3 percent, well above the Fed's 2 percent goal.

Waller also flagged a pending Commerce Department methodology change for estimating financial-services fees that he expects could lower 12-month PCE inflation by a few tenths of a percentage point, calling it a "welcome measurement correction."

August Data Holds the Pivot

The governor left the door open to a hike, saying "if inflation comes in hot, I would consider a rate hike," and describing policy as only slightly restricting aggregate demand. That makes the August CPI print, due next week, the decisive input before the FOMC convenes.

Banks remain split on the outcome. HSBC raised its two-year Treasury yield forecast to 4.20 percent for end-2026 and its 10-year forecast to 4.65 percent, citing a more hawkish Fed outlook and describing the FOMC debate as "on a fine edge." Goldman Sachs, by contrast, holds to a year-end S&P 500 target of 8,000 and expects the committee to stay on hold.

This article is for informational purposes only and does not constitute investment advice.