Federal Reserve Governor Christopher J. Waller shocked markets on May 22, 2026, by publicly supporting the removal of the "easing bias" from the FOMC policy statement and warning that a resumption of rate hikes cannot be ruled out if inflation expectations become unanchored. The speech signals a definitive hawkish shift, slamming the door on near-term rate cuts.
Inflation Heading the 'Wrong Way': PCE Estimated at 3.8%
Speaking in Frankfurt, Germany, Waller pointed to energy price spikes from the Middle East conflict seeping into other goods and services. He estimated that the Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) price index, likely hit 3.8% year-over-year in April—a three-year high. Core PCE, excluding food and energy, climbed to 3.3%, the highest in two and a half years. Notably, more than half of consumer categories saw price increases above 3%, a historically rare breadth of inflation. "Inflation is not moving in the right direction," Waller said. "The longer energy price shocks persist, the greater the risk of spillovers into other goods and services."
Three-Pronged Policy Shift: Remove Easing, Hold, Then Hike?
Waller laid out a clear hawkish stance on the path ahead:
- Remove easing bias: He supports deleting the "easing bias" language from the FOMC statement to signal that rate cuts are no more likely than hikes.
- Hold steady for now: With the unemployment rate at 4.3%, the labor market is balanced and not overheating. At current restrictive rates, he favors "waiting and watching" as the Middle East situation unfolds.
- Rate hikes back on the table: If inflation fails to cool and especially if inflation expectations become "unanchored," he would not hesitate to support raising the federal funds rate target.
Bayesian Updating: Consecutive Shocks May Cement Inflation Expectations
Waller invoked the concept of "Bayesian updating" from probability theory to explain public psychology: although last year's tariff shock and this year's oil shock are each temporary, repeated positive price shocks can lead people to revise their long-run inflation expectations upward, making inflation more persistent. He noted that the U.S. has failed to achieve its 2% inflation target for over five consecutive years—an "unpleasant arithmetic" that policymakers must confront. Until substantial improvement in inflation or a significant weakening in the labor market materializes, the door to rate cuts remains shut.