04.09.202611:24 Forex Analysis & Reviews: Fed outlook becomes fully data-dependent after Waller's nuanced Jackson Hole remarks

Federal Reserve Governor Christopher Waller said his next rate decision will be heavily influenced by August inflation data due next week. In prepared remarks he sounded close to supporting a hike, but in the subsequent Q&A he noticeably softened his tone, saying he expects "reasonable" inflation readings. That contrast between prepared remarks and live answers drove the market reaction.

Waller framed his comments as a fork in the road with two equally plausible outcomes. "If there is continued progress toward our 2% goal, then I am willing to support holding the policy rate at its current level," he said, adding: "But if inflation comes in hot, I would consider a rate hike." Describing policy as somewhat restrictive, he warned that less dramatic inflationary strength could still push him toward a tighter stance.

The crucial moment came when he went on to say he is wary of the risk of tightening into falling inflation and suggested current policy settings might themselves be sufficient to return inflation to target. "I'm going to paraphrase John Lennon here. Give disinflation a chance," Waller said. "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." Those words upend recent hawkish logic because, for the first time publicly, Waller openly weighs the risk of inaction against the risk of premature tightening.

Markets reacted immediately—and notably to the Q&A rather than to the speech itself. Traders cut the probability of a September hike to roughly 50% based on Fed funds futures. Risk assets and gold benefited, while the dollar slid to a May low, and those who had positioned for a hawkish outcome after Jackson Hole suffered losses.

Waller's remarks echo recent comments from New York Fed President John Williams and challenge the market's post-Warsh expectation of a near-term hike. The balance of forces on the committee has shifted over the past week.

At least two influential officials have now publicly argued against a September increase. Williams on Wednesday cited evidence of easing inflation as tariff effects fade, while Waller on Thursday made a similar point: energy costs have risen but have not yet translated broadly into services inflation. Those leaning for a hike include Governor Michael Barr, who warned of the risk of entrenched price pressures, and three regional presidents who dissented in July. Chair Warsh has argued that financial conditions do not look restrictive.

Does that mean the committee is evenly split? I do not think so—the tilt is toward a pause. Williams, as New York Fed president, holds a permanent vote and is traditionally the committee's second most influential member, and Waller is a Fed governor. Two such officials publicly favor pause and carry more weight than three rotating regional dissenters.

Waller's Q&A also went beyond the rate debate to assert his preferred communication strategy, a three-part approach combining current policy views, an outlook, and—under certain conditions—the use of forward guidance. That is a direct divergence from the chair's stated reform to reduce forward guidance and cut back on public communications. Waller said he agreed with Chair Warsh that forward guidance was inappropriate now and in many situations but added that when it was needed, he thought it should be used. That caveat effectively amounts to a public disagreement over institutional reform and follows criticism in July that Warsh's views lacked sufficient clarity for markets. The dispute is now about both policy and how much the Fed should talk.

My base case is that the funds rate will remain unchanged at the September 15–16 meeting, and that the decisive input will be the September 11 inflation print that Waller flagged. If the August data confirm disinflation, a pause will likely be agreed without significant controversy, although two or three hawks may again vote against. The risk—noted by Waller himself—is that hotter-than-expected inflation could reverse his position and tilt the committee back toward tightening, since the current balance of power means a single influential vote can change the outcome.

Technical analysis of EUR/USD and GBP/USD

EUR/USD: buyers need to take 1.1640 to target 1.1660. From there a move to 1.1675 is possible, but achieving that without support from major players will be difficult. On the downside, any serious buying is likely only near 1.1620. If there are no buyers there, it would be prudent to wait for a fresh low at 1.1600 or consider longs from 1.1580.

GBP/USD: pound buyers need to clear the nearest resistance at 1.3494 to target 1.3515; a break above that level will be challenging. The farther target is 1.3531. On a decline, bears will attempt to seize control of 1.3475. If they do, a break of the range will inflict a serious blow to bulls and push GBP/USD toward 1.3457 with a prospect of extending to 1.3435.