FXT Financial Focus (Asia-Pacific 09/04)Waller Turns Dovish as Fed Pause Expectations Rise

Fed Governor Christopher Waller struck a more dovish tone on Thursday, noting that the US economy remains resilient. Real GDP grew at a 1.8% annualized pace in the first half, supported by steady consumer spending and business investment, while Waller expects full-year growth to slightly exceed 2%. The labor market also remains stable, with unemployment falling to 4.1% in July and layoffs and jobless claims staying low. With growth and employment holding up, inflation has become the key factor shaping the Feds September decision.

Recent inflation trends are the main reason behind Wallers shift. Headline and core PCE both rose 0.2% m/m in July, while the three-month annualized core inflation rate slowed from 4.76% in February to around 3.05% in July. Waller also noted that some non-market services components of core PCE rely heavily on statistical estimates and may not fully reflect underlying supply and demand. Although headline and core PCE remain elevated at 3.7% and 3.3% y/y, he is placing greater emphasis on recent momentum.

Tariffs and energy shocks have so far failed to generate broad and persistent price pressures. Waller believes much of the initial tariff impact on goods prices has already passed through, while there is little evidence that higher energy costs are spreading widely across goods and services. Adjusted for productivity gains, wage growth also remains broadly consistent with inflation gradually returning toward 2%. Still, energy prices, additional tariffs and stronger demand for high-tech equipment linked to AI infrastructure remain potential upside risks.

AI investment continues to support the US economy, with strong capital spending on data centers, power infrastructure, advanced computing equipment and software. Waller rejects the view that the concentration of AI spending in a few industries exaggerates economic growth, arguing that construction and equipment purchases represent genuine economic activity. Even if data-center construction eventually slows, AI could continue supporting investment and growth through higher productivity.

Against this backdrop, the September 15–16 FOMC meeting will depend heavily on August inflation data. Waller currently favors keeping rates unchanged as long as incoming data confirm that disinflation remains on track, leaving little urgency for further tightening. However, a renewed acceleration in August inflation could still lead him to support another rate hike.

Waller also stressed that rather than pre-committing to a future rate path, he prefers markets to understand how the Fed would respond under different economic scenarios. Policy will therefore remain highly data-dependent. If tariff and energy effects remain contained, the Fed could extend its pause; if core inflation accelerates again, discussions of further tightening could quickly return.

From FXT‘s perspective, Waller’s remarks point more toward a dovish pause than a shift toward monetary easing. Resilient US growth and employment give policymakers room to wait for more inflation evidence, while softer recent core price pressures reduce the need for an immediate hike. Holding rates steady in September is increasingly becoming the base case, although energy, tariffs and AI-related demand remain inflation risks. The policy outlook will ultimately depend on whether disinflation continues and whether external price shocks spread more broadly.

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