Waller Puts CPI Back In Charge

The Big Picture

After last week’s soft employment report, markets had pushed the July hike case to the margins. Governor Christopher Waller pushed back against the comfort trade, saying the main US risk is now high inflation rather than labour-market weakness. His argument was blunt: compared with a year earlier, the risks had “completely flipped”, with the labour market stabilising while inflation was accelerating again.

The services data supported that caution. The ISM services PMI eased only slightly to 54.0 in June, business activity and new orders remained in expansion, employment returned to expansion for the first time in four months, and the prices index stayed elevated at 67.7 even after falling from May. That is not a July-hike mandate, but it is enough to keep September alive.

The policy signal is therefore narrower than the market’s first payrolls reaction suggested. Weak hiring bought the Fed time. Waller’s comments and the services-price data prevent that time from becoming a pivot. The July 14 CPI report now carries the Fed debate into the July 28-29 FOMC meeting.

Globally, July 6 showed divergence rather than relief. The Bank of Israel cut rates again, supported by stable inflation, a stronger shekel and lower energy risk after the US-Iran ceasefire. ECB officials, by contrast, warned that the Iran shock, fiscal pressure and longer-term structural uncertainty still argue against declaring victory.

Today’s Board

On Constitution Avenue: Waller Rebuilds the Hike Case

Waller’s Rome remarks were the first important Fed communication after the weak June payrolls report.

He did not pre-commit to a July move. But he made clear that the Fed’s risk map has shifted back toward inflation. Reuters reported that investors were still pricing a July hike probability of roughly one in four, while expecting rates to rise by September; Waller’s comments help explain why the September case survived the payrolls disappointment.

His separate speech on monetary-policy transmission also matters for the Warsh Fed. Waller argued that forward guidance can accelerate policy transmission when expectations are the key channel, but warned that overly strong or rigid guidance can obstruct policy if the facts change. That is consistent with Chair Kevin Warsh’s preference for less hand-holding, but it also places a burden on the Fed to keep its reaction function intelligible.

The practical reading is simple: July is still a high bar after payrolls, but the Fed is not comfortable. If CPI is firm, Waller has already given markets the argument for reviving a near-term tightening debate.

Washington Data Board: Services Refuse to Crack

The ISM services report kept the soft-landing-but-sticky-inflation mix alive.

The headline services PMI slipped to 54.0 from 54.5, but remained in expansion. Business activity was 55.4, new orders were 55.1, and employment rose to 51.2, marking the first expansion in services employment in four months. Fourteen industries reported growth.

The prices index fell to 67.7 from 71.3, its lowest level in four months, but remained high. ISM also noted that lower gasoline and diesel costs helped some respondents, while higher oil prices were still expected to move through supply chains.

That combination does not overturn last week’s payrolls cooling. It does, however, argue against treating the labour report as a dovish all-clear. Services demand is still expanding, employment is not collapsing, and price pressure remains too high for the Fed to sound relaxed.

Jerusalem: A Rate Cut With a Local Passport

The Bank of Israel delivered one of the clearest easing decisions of the day.

It cut its policy rate by 25 basis points to 3.5%, the second consecutive reduction and the lowest level since early 2023. Governor Amir Yaron said rates could fall toward the 3% area, with annual inflation at 1.9% in May, inside the 1-3% target range.

The central bank cited a stronger shekel, lower energy prices and improved labour-market conditions, while still warning about geopolitical risk, energy prices, fiscal loosening and wages.

Israel can cut because its inflation and currency mix allow it.

Rome and Frankfurt: ECB Officials Say No All-Clear

ECB officials kept the inflation-risk guardrails in place.

Isabel Schnabel, ECB’s board member, said the euro area had not returned to the pre-Iran-war environment, even though oil prices had fallen. She pointed to gas prices, refining spreads, supply-chain costs and heat-related food risks as reasons to remain cautious.

Fabio Panetta added a different risk: fiscal dominance. He warned that Europe’s central banks may face political pressure as governments confront pension, defence and industrial-policy demands. That is a credibility issue, not just a budget issue.

Philip Lane’s Rome speech added the structural angle. He argued that AI could affect inflation, energy demand, investment cycles and the neutral rate, but said the net effect on monetary policy remains uncertain and supports a data-dependent approach.

 

The ECB’s message is therefore not a clean tightening signal, but it is still a caution signal. The next move may not be imminent, but officials are not ready to describe the inflation shock as finished.

Markets: Oil Relief Helps, but Does Not Set Policy

Oil gave central banks some help, but not enough to change the Fed’s reaction function.

Reuters reported that Brent and WTI eased on July 6 as expectations of higher OPEC+ supply outweighed Middle East supply concerns. Lower oil reduces the risk of a headline-inflation surge, but it does not solve the services-price problem that matters most for the Fed.

That is the market’s sequencing problem. Payrolls reduced the urgency of July tightening. Oil helps the headline inflation story. But Waller and ISM services keep the Fed focused on whether underlying inflation is still too persistent.

Policy Themes

Payrolls bought time; Waller removed comfort. The Fed can wait after weak hiring, but it cannot sound dovish while inflation risk is still described as the main policy threat.

Forward guidance is now part of the policy debate. Warsh wants less pre-signalling; Waller says guidance can help when expectations matter but can hurt when it becomes rigid. Markets will need to trade data, not promises.

Divergence is local, not global. The Bank of Israel can cut because inflation is inside target and the shekel is strong. That does not translate to the Fed, ECB or other central banks still facing sticky price pressure.

CPI is the next policy gate. July is unlikely unless CPI is uncomfortably firm, but September remains highly sensitive to inflation, services prices and wage persistence.

The Week Ahead

Mint Street Notes

Mint Street starts the week with a currency problem rather than a rate problem.

The rupee fell to a three-week low on Monday, touching 95.4750 per dollar before ending at 95.3950. The pressure was not mainly oil. Brent had moved back near pre-Iran-war levels, but merchant dollar demand and renewed onshore-offshore arbitrage flows outweighed that relief. The bond market offers a partial offset. Foreign investors have bought heavily into the benchmark 2036 bond, supporting duration even as the rupee weakens. That gives the RBI room to separate currency management from rate signalling for now.

The Fed remains the external trigger. A soft US CPI would ease dollar pressure and help the RBI defend the wait-and-watch stance. A firm CPI would revive Fed-hike pricing, test the rupee’s 96 area and make FX intervention the first line of defence.

Mint Street’s position is therefore unchanged: preserve rate optionality, lean against disorderly currency moves and avoid turning temporary external pressure into a domestic hike signal unless inflation or the rupee forces the issue.

The Signal

Waller turned a soft payroll week back into an inflation week. July is still mostly a hold; September belongs to CPI.

Sources: Federal Reserve, Institute for Supply Management, Bank of Israel, European Central Bank, Reserve Bank of New Zealand, Bank Negara Malaysia, Bank of Korea, Bank of England, Bank of Japan, Reserve Bank of India, Reuters.