Federal Reserve Governor Christopher J. Waller said the U.S. central bank's September interest rate increase was not a reaction to any single data point but the culmination of forces that built up over the past year, and he signaled that additional hikes are likely if the economy evolves as expected—though the timing retains some flexibility.

Waller, whose seat on the Federal Reserve's Board of Governors gives him a permanent vote on the central bank's interest rate decisions, delivered the remarks, titled "The Signaling Value of the Summary of Economic Projections," on October 8 at the Istanbul Economic Forum, hosted by the Central Bank of the Republic of Türkiye in Istanbul, Türkiye. The full text is available on the Federal Reserve's website.

Thanking the Central Bank of Türkiye for the opportunity to speak, Waller said he looked forward to hearing perspectives on the global economy and Türkiye's role in it, but that the most constructive use of his time would be to offer a brief update on the U.S. economy and then share some thoughts on central bank communication.

From Insurance Cuts to a Rate Hike

Waller began by recapping the recent shift in policy. In September, the Federal Open Market Committee (FOMC) voted to raise its policy rate by 25 basis points—a quarter of a percentage point—to a range of 3.75 percent to 4 percent, after nine months in which the rate was held steady. The move marked a reversal from the second half of 2025, when the committee reduced rates by 75 basis points over three successive meetings, from September through December of that year.

"When monetary policy changes in this fashion, one question that most people ask is, what comes next?" Waller said. He promised to address that question, but first turned to another raised by the shift: what changed? Was there new evidence, or had his thinking about the economy evolved?

The answer, he suggested, had a great deal to do with where policy goes from here. When he asks "What changed?" he is asking what changed in the seven weeks between July 29, when the FOMC voted to hold rates steady, and September 16, when it raised them. But he is also asking what changed from the second half of 2025, when the committee cut rates by 75 basis points over three meetings.

"While it might seem to some that monetary policy has turned on a dime, or on one or two data points, in my case my decision last month was the culmination of factors that developed over the past year," Waller said.

He explained the reasoning behind the 2025 cuts. At that time, inflation was fairly close to the Federal Reserve's 2 percent target after accounting for tariff effects that research found were passing through measures of inflation. At the same time, there was significant evidence of a weakening labor market: unemployment increased over the first eight months of the year and job creation was very low. Although the picture became less sharp after official data was interrupted by the government shutdown that began on October 1, other data supported the view that the balance of risks to the FOMC's employment and inflation goals was clearly skewed toward employment.

"I considered our cuts to the policy rate last year as insurance against an economic slowdown," he said.

A Stall, Then a Turn

Over the course of the first half of 2026, the labor market appeared to stabilize, while progress on inflation stalled, due in part to the conflict in the Middle East that drove energy prices very high. Waller supported leaving the policy rate unchanged in the spring and summer in the hope that the conflict would end soon and that the oil price surge would not have a lasting effect on inflation.

There were some signs of easing. While headline inflation seesawed with oil prices and the state of the Middle East conflict, core personal consumption expenditures (PCE) inflation—the Fed's preferred inflation gauge, which excludes volatile food and energy prices—moderated to 0.1 percent in June and to an initial estimate of 0.2 percent in July that was later revised to 0.1 percent.

But other forces were undermining that progress, Waller said. First, hopes for a quick ending to the Middle East conflict faded, and experts warned that low inventories and damaged infrastructure could keep oil prices high through 2027. Second, evidence mounted that the artificial intelligence buildout was significantly driving up high-tech consumer prices, and projections for the size of that buildout ballooned. Third, continuing trade conflicts threatened new tariffs that could put upward pressure on inflation yet again. In most cases these forces became clearer as the year passed, swamping the fleeting signs of progress toward 2 percent inflation.

"When the first inflation reading for August came in hot just before the FOMC's September meeting, it was impossible to deny that inflation was still too high and not making sufficient progress toward our target," he said.

Not a One-Data-Point Decision

Waller pushed back on suggestions that monetary policy shifted in September based largely on the single data point of August consumer price index inflation. For him, the decision reflected "a preponderance of evidence over several months" that the risks for monetary policy had shifted, reflecting a strengthened labor market and a range of persistent inflationary forces. That led to the judgment that the policy setting maintained from December 2025 through September of this year would not be sufficient to return inflation to 2 percent in a timely manner.

He added that his decision to change the stance of policy emerged over time because it is not one he takes lightly. With evidence that economic activity is strengthening in the second half of the year, he is not greatly concerned that tighter monetary policy threatens a damaging slowdown. His concern is rather that the recent acceleration in inflation—after what will soon be five and a half years above the FOMC's target—will lead consumers, investors, and price-setting businesses to revise up their expectations for future inflation.

Where the Economy Stands

Based on key data released the week before the speech, Waller sees the economy in roughly the same place as at the time of the FOMC's September meeting. While the number of jobs created was down overall, the employment report indicated that the labor market continued to be solid and stable in September. The unemployment rate remains relatively low and near the median of policymakers' projections of its longer-run level, while payroll gains are in the range of estimates of the breakeven pace needed to keep the unemployment rate steady.

August inflation data, which included revisions to the government's methodology, showed monthly core PCE inflation of 0.25 percent and a 12-month change of 3 percent. Looking at the history of 12-month core inflation, Waller noted it has been between roughly 2.5 percent and 3.0 percent since the spring of 2024—higher than desired, above target, and not showing sufficient progress.

"Overall, the new data reinforce my view that the labor market is stable and inflation is too high," he said. "For at least the near term, policy will be focused on the inflation side of our mandate."

The Signaling Option

The remainder of the speech addressed a particular way of communicating the expected future stance of monetary policy that, in Waller's words, "has the flavor of forward guidance but isn't forward guidance."

He illustrated the idea with an example. Suppose a majority of FOMC voters decide that policy needs to be more restrictive and it is fairly clear to the public that some tightening is likely. Policymakers and markets then need to determine the number of rate hikes and their pace. Each policymaker thinks about his or her anticipated appropriate policy path to help move the economy toward the Fed's dual mandate—its statutory goals of maximum employment and price stability—while markets estimate what FOMC voters believe is the appropriate path in order to price various assets.

Assume policymakers have in mind three 25 basis point hikes, so that policy ultimately ends up 75 basis points higher. Waller laid out three communication options.

First, policymakers could say nothing about the expected path of the policy rate. But that approach could surprise markets and create volatility: without additional information, markets could in an extreme case price in zero or even five hikes at future meetings. If too few or too many hikes are priced in, the resulting change in financial conditions would deliver too little or too much of an effect on economic activity.

Second, policymakers could use a strong form of forward guidance—for example, communicating support for raising the policy rate every other meeting by 25 basis points until a total of 75 basis points worth of hikes has been enacted. Markets would respond by pricing in 75 basis points of hikes over five meetings. While this eliminates uncertainty about the future path, it ignores the possibility that incoming data would suggest going faster or slower, or hiking more or less than 75 basis points. Locking in a policy path over such a long period is unlikely to lead to good outcomes given the uncertainty around how the economy will evolve, Waller argued.

Finally, there is an approach in between that he called the signaling option: policymakers could signal that the policy rate will likely be hiked 75 basis points over some time interval—say, the next six months—without saying what the pace of hikes will be or how large each increment will be, while emphasizing that the course of policy is not predetermined and will depend on incoming data and its implications for the dual-mandate goals. This provides some information about the terminal rate after hiking while allowing the pace and size of hikes to remain data dependent.

"Simply put, policymakers could signal where they are likely headed while acknowledging that there is no fixed final destination—except for the achievement of price stability and maximum employment," Waller said.

Dots and Markets Converge

Waller said he sees Federal Reserve policymakers' communications fitting this last approach, both in public remarks and in quarterly submissions of economic projections, with the Summary of Economic Projections (SEP) serving that signaling role. In the SEP, each participant's assessment of the appropriate federal funds rate is charted as an individual dot—a visual markets widely track as the dot plot. The projections submitted at the September meeting showed that a large majority of FOMC participants believe it will be appropriate to raise rates at least once more this year: 16 of the 18 participants who submitted dots anticipated at least one more hike during the two remaining meetings of the year, and four of those 16 expected two additional hikes.

Reading the dots for the full year of 2027 is more complicated, he acknowledged, since they may reflect hikes early in the year followed by cuts later, but eight participants expect rates to be 50 basis points higher at the end of 2027 than they are today.

Between the SEP and policymakers' outlook speeches—which encompass their interpretation of additional economic data—markets have interpreted the Committee as likely to raise the policy rate 50 basis points in the coming months. According to futures market prices for the federal funds rate as of the day before the speech, traders saw an 85 percent chance of at least one hike by the end of the FOMC's December meeting and a nearly 20 percent chance of two hikes. By the March 2027 meeting, markets saw nearly an 80 percent chance of at least two hikes and a 33 percent chance of three or more.

This signaling, Waller said, helps anchor the path of short-term interest rates while providing flexibility to adjust rate hikes based on incoming data.

"If the economic data continue to come in as expected, I anticipate additional hikes to support a timelier return of inflation to our 2 percent goal," he said. "But there is some flexibility about when those hikes will occur. The hikes do not need to come at consecutive meetings, but they should be place in an acceptable period of time."

With two FOMC meetings left on the 2026 calendar, the incoming inflation and employment readings Waller described will shape the timing of the additional hikes he anticipates.

Waller closed by saying he would stop there to make sure there was enough time for discussion.

The Federal Reserve notes that the views expressed in the speech are Waller's own and are not necessarily those of his colleagues on the Federal Reserve Board or the Federal Open Market Committee. A PDF version of the speech is also available on the Fed's website.