A jumbo half-point rate hike in December may be necessary, Federal Reserve Governor Christopher Waller said Tuesday, citing “no silver lining” to September’s inflation figures.

“Let’s just say it. September’s inflation data were bad,” Waller commented during a Bank of England event in London.

The U.S. central banker spoke just hours before consumer price index (CPI) data for October landed on American doorsteps.

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“If the October CPI inflation data out later today are similar to the past two monthly readings — with core CPI inflation around 0.3% or even higher — then a stronger policy move may be needed,” Waller cautioned, according to prepared remarks.

“In that case, I believe a 50-basis-point hike in the policy rate should be considered at the December meeting,” he added. “Hiking only 25 basis points would put our credibility at risk — a risk I am not eager to take.”

Turns out, October’s inflation data wasn’t pretty.

While the 0.4% monthly rise in headline CPI inflation was less than September’s 0.6% increase, core CPI less volatile food and energy prices matched the prior month’s 0.3% gain.

The headline figure was roughly in line with consensus estimates, but economists polled by Reuters and Dow Jones had predicted just a 0.2% increase in core inflation.

Market tightening

Waller voted with the consensus to leave interest rates unchanged in October.

He defended that move Tuesday, saying the Federal Open Market Committee’s “communication about the likely tightening of policy had already led financial markets to price in some tightening.”

But Waller stressed that for Fed communication to be “clear and credible,” rate hikes will eventually need to be executed to avoid reactionary monetary loosening by financial markets.

“While the precise timing of the hikes doesn’t matter, ensuring that the promised hikes are implemented in a reasonable period of time does,” he said.

Waller devoted a large chunk of his speech to the “solid” labor market, saying average monthly payroll gains of 80,000 over the past six months are “entirely consistent” with his view that “supply and demand for labor are in rough balance.”

That said, he acknowledged that the “low hire, low fire” environment reflects a “decline in labor market dynamism,” pointing to the protracted job searches unemployed workers have had to endure and the difficulties recent graduates have had breaking into the workforce.

“Both these developments may reflect a labor market that is not as healthy as the headline unemployment rate indicates, with implications for the longer-term path of monetary policy,” Waller warned.

Still, inflation above the Fed’s 2% target remains the monetary focal point with Iran war impacts still present, he said, citing recent Fed research finding “a potential shift in the inflation process after the pandemic that suggests core inflation may be more responsive to energy shocks.”

‘Still work to do’

In separate remarks delivered Tuesday in Washington, D.C., Fed Governor Michelle Bowman admitted that “inflation has proven to be more persistent than I had anticipated.” Like Waller, she voted to hold interest rates steady last month.

This week’s CPI release from the Bureau of Labor Statistics did not include an annual inflation rate. Last October, there was no inflation report due to the 43-day federal government shutdown that began Oct. 1, making a 12-month comparison fruitless.

But based on the October CPI data, Bowman estimated that core inflation measured by the Fed’s preferred personal consumption expenditures price index accelerated to 3.3% in October on an annual basis compared to a 3.1% pace in September.

She cited a “confluence of shocks” contributing to September’s stalled progress on lowering inflation, with U.S. tariff policies, war-driven energy disruptions and AI-related price pressures each contributing about 25% of the above-target core reading. The remaining one-fourth “likely reflects persistent effects from the inflationary shocks in recent years,” she said.

Bowman cautioned that the October CPI print suggests “inflation pressures may persist for longer,” indicating “there is still work to do to bring inflation closer to 2%.”