Fed's Waller channels his inner John Lennon with a plea to 'give disinflation a chance'

By Michael S. Derby and Howard Schneider

WASHINGTON, Sept 3 (Reuters) - Federal Reserve Governor Christopher Waller said on Thursday he is leaning toward keeping interest rates steady at the U.S. central bank's policy meeting this month if the next batch of inflation data shows price pressures are continuing to moderate.

Pointing to the importance of "what we learn" about inflation data for ‌August, Waller told a Reuters NEXT Newsmaker event in Washington that "if there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level."

"I'm ‌going to paraphrase John Lennon here. Give disinflation a chance" and refrain from prematurely raising rates to allow a cooling process to play out, Waller said. In terms of that patience, "I'm not going to say let's wait until next year, but let's just wait ​and see if we get some improvement on this."

Waller, however, said the data could also move in a way that would lead him to argue that the Fed needs to take action to control price pressures at its September 15-16 policy meeting.

"If inflation comes in hot, I would consider a rate hike," he said.

The Fed governor noted that the central bank's benchmark overnight interest rate, which has been in the 3.50%-3.75% range since December, is "only slightly restricting aggregate demand," and "it may not take much acceleration in inflation to nudge me into supporting tighter policy."

Waller acknowledged that inflation is "meaningfully above" the Fed's 2% target, but said it "is making slow but continued progress on reaching" that ‌level.

He said an easing of inflation, measured by the change over three months ⁠in the Consumer Price Index on an annualized basis, would be the sort of move that would make him comfortable arguing for holding rates steady. He added, however, that he did not want to put a numerical estimate on his threshold for policy action.

The U.S. Labor Department is scheduled next week to release the August CPI ⁠report, which will be the last major data on prices ahead of the next Fed policy meeting. While it is not the central bank's main inflation barometer, Waller said the CPI data will provide "a pretty accurate idea" of where the Personal Consumption Expenditures Price Index will come in.

That index was up 3.7% in July on a year-over-year basis.

Ahead of Waller's remarks, investors had been pricing in solid odds of a quarter-percentage-point rate hike this month. A wide range ​of ​central bank officials has voiced concern about inflation in recent weeks, with some calling for rate hikes and others signaling ​openness to action to bring what have been persistent above-target price pressures back to ‌the target.