WASHINGTON, July 6, 2026, 15:02 (EDT)
- Fed Governor Christopher Waller said the balance of risks at the central bank is now tilted more toward high inflation than labor market weakness as the July 28-29 meeting approaches.
- The Fed’s projections in June set 2026 PCE inflation at 3.6%, higher than the 2.7% estimate in March. They also raised the expected federal funds rate for 2026 to 3.8% from 3.4%.
- Traders kept the odds of a July rate hike at about 25%, with half of Fed projection submitters expecting at least one hike in 2026.
Federal Reserve Governor Christopher Waller told investors on Monday that inflation is now the main policy concern for the U.S. central bank, shifting focus away from jobs and putting more attention on the July meeting.
Waller told a Bank of Italy event in Rome the Fed’s risks have “completely flipped around” from a year ago. The labor market “seems to be stabilizing,” he said, but inflation is up. Waller didn’t give a specific proposal on rates. The Wall Street Journal
The main market takeaway came in his prepared remarks. Waller pointed out the two-year Treasury yield jumped almost 200 basis points from September 2021 through mid-February 2022 as the Fed hinted at tightening. The first rate hike wasn’t until March 2022. He said that early rise shortened the standard 12- to 24-month policy lag by about six months.
This is key now since the Fed’s June projections came in more hawkish than what futures were pricing. The Fed held its funds target range at 3.50%-3.75% in June, but the projection materials showed both a higher inflation path and a higher policy rate outlook compared to March.
| Fed median projection for 2026 | March | June | Shift |
|---|---|---|---|
| Real GDP growth | 2.4% | 2.2% | -0.2 point |
| Unemployment rate | 4.4% | 4.3% | -0.1 point |
| PCE inflation | 2.7% | 3.6% | +0.9 point |
| Core PCE inflation | 2.7% | 3.3% | +0.6 point |
| Appropriate federal funds rate | 3.4% | 3.8% | +0.4 point |
The dot plot for June was mixed, showing division. Out of 18 projections at the 3.625% midpoint, nine were above that level. Six suggested the Fed could raise rates at least twice by the end of the year.
| June 2026 policy-rate dot | Participants | Rate read-through |
|---|---|---|
| 3.375% | 1 | Below the current midpoint |
| 3.625% | 8 | Matches current midpoint |
| 3.875% | 3 | Up by 25 basis points |
| 4.125% | 5 | Up two hikes |
| 4.375% | 1 | Up three hikes |
Traders using CME Group’s NASDAQ:CME FedWatch tool assigned about a 25% chance to a 25-basis-point hike at the July 29 Fed meeting, according to Reuters. The tool, which draws on 30-Day Fed Funds futures, shows the market is not fully aligned with the Fed’s dot plot.
Waller said he has always been committed to the Fed’s 2% inflation target, according to the Wall Street Journal. He dismissed calls to change it, telling InvestingLive that the 2% goal is a credible promise and moving the target wouldn’t be credible now.
Waller’s remarks skipped a clear rate signal for markets. Instead, he issued a warning on Fed communication. He said forward guidance lets policy react quickly but that strict guidance in 2021 “tied the hands” of the central bank and slowed rate hikes. “In some cases, it’s best not to use it at all,” Waller said. Federal Reserve
Stocks traded higher near the dateline, with SPDR S&P 500 ETF Trust NYSEARCA:SPY up 0.9%, Invesco QQQ Trust NASDAQ:QQQ adding 1.5%, and SPDR Dow Jones Industrial Average ETF Trust NYSEARCA:DIA up 0.2%.
Tech and semiconductor stocks are driving the rate-sensitive equity trade. Broadcom NASDAQ:AVGO jumped 3.8% after it renewed its custom-chip supply contract with Apple NASDAQ:AAPL through 2031. Microsoft NASDAQ:MSFT dropped 1.2% after announcing plans to cut around 4,800 jobs. “There is a risk, particularly if the Fed continues to see higher interest rates for longer,” said Jake Dollarhide, CEO of Longbow Asset Management. Reuters
Tim Duy, chief U.S. economist at SGH Macro Advisors, said “a rate hike is on the table” for July. Unemployment is low, inflation is still above target. “This shouldn’t be a debate anymore,” Duy wrote. Reuters
June’s CPI data is up next on July 14, the last major inflation read before the Fed’s July 28-29 meeting. Oil hanging near $70 could help cool headline inflation, but Fed officials in June still saw year-end PCE inflation more than a point above their 2% target.
Related articles: Inflation
