Fed Governor Waller warns December rate hike may need to jump by half a point

Christopher Waller, a voting member of the Federal Reserve Board, told investors in London on Tuesday that the central bank should raise borrowing costs again in December. He indicated the move might need to be bigger than the standard quarter-point step if price data stays stubborn.

Waller argued the Fed must follow through on signals it has already sent. He noted that officials hinted at further increases during the October policy meeting. If the bank does not act, Waller warned, markets will lose faith. That loss of confidence would push interest rates down on its own, effectively loosening policy when the goal is to tighten it.

The decision will hinge on the consumer price index report released by the Bureau of Labor Statistics on Tuesday. Waller said a weak inflation number might not stop him from supporting a hike. However, a strong number would push him toward a 50 basis point jump rather than a 25 basis point bump.

He clarified that the Fed does not need to raise rates at every single meeting. The key is to act within a reasonable window. He described the need for higher rates as a matter of timing, stating they are needed sooner rather than later even if there are pauses between hikes.

The Federal Open Market Committee held rates steady in October. Two officials, Governor Lisa Cook and Cleveland Fed President Beth Hammack, dissented from that decision. The next chance to change policy is scheduled for December 8 and 9.

Financial markets currently expect a smaller move. Data from CME Group's FedWatch tool shows traders assign more than 80 percent odds to a quarter-point hike. They see no chance of a half-point increase. Chicago Fed President Austan Goolsbee warned on Monday that policymakers must prevent the economy from overheating, noting that cooling it down later would be painful.

Waller offered a positive view of the current economic conditions. He called growth healthy and the labor market solid. He noted the job market is stable but slow, defined by low hiring and low firing rates.