Federal Reserve Governor Christopher Waller has issued a hawkish signal, cautioning that the central bank may need to tighten monetary policy in the near term if core inflation data continues to run hot, a statement that has sharply increased market uncertainty about the interest rate outlook.

Waller stated on Monday, "If we see another hot core inflation print this week, then the FOMC will need to consider tightening monetary policy in the near term."

The U.S. Bureau of Labor Statistics is scheduled to release the latest Consumer Price Index data on Tuesday. According to a Bloomberg survey of economists, the market expects the year-on-year CPI increase for June to slow to 3.8% from 4.2% in May.

Waller's comments align with the direction of last month's FOMC meeting minutes, which revealed that some officials already see a case for raising rates. In the latest economic projections, half of the 18 officials forecast at least one 25-basis-point rate hike at some point this year. This indicates that the option of raising rates is moving from the periphery to the center of policy discussions.

Following Waller's remarks, the yield on the 10-year U.S. Treasury note spiked, rising over 5.2 basis points to a daily high of 4.6156%. The two-year Treasury yield increased by about 7 basis points, hitting a daily high of 4.2773%. The Nasdaq 100 index extended its decline to 1.9%, reaching a new daily low. Spot gold fell by 3%, dropping below the key psychological level of $4,000 per ounce for the first time since July 1st.

Persistent Core Inflation Puts Monetary Policy at a Crossroads

Waller noted that the overall U.S. economic situation remains sound, the labor market appears stable, and consumer demand continues to show resilience. However, he stated that current monetary policy is at a "crossroads" due to inflationary pressures stemming from tariffs, energy prices, and the construction of artificial intelligence infrastructure.

He pointed out that the Fed's preferred inflation gauge, the core Personal Consumption Expenditures (PCE) index excluding food and energy, had risen 3.4% year-on-year as of May and has been trending higher since January, beginning its ascent even before the outbreak of the U.S.-Iran conflict.

"By any measure, inflation has been rising this year," Waller said. "I am currently concerned about the trend of high core inflation." He identified factors driving inflation higher, including tariffs, energy prices, and large-scale AI infrastructure buildout.

Learning from Pandemic Inflation, Rate Hikes Should Not Be Ruled Out

Waller explicitly cited the policy missteps during the pandemic inflation period as a cautionary tale.

He warned that the FOMC was widely criticized at that time for being too slow to raise rates, and such mistakes must not be repeated. "The FOMC must be prepared to tighten monetary policy to prevent a repeat of the 2021-2022 inflation episode," he said.

Currently, the Fed unanimously voted to maintain the benchmark interest rate unchanged last month.

Waller expressed his desire to see a lower core inflation reading, stating that if achieved, he would support continuing to hold rates steady. However, he also set a condition: following persistent inflation increases in the first half of this year, "I would need to see several months of cooling data to be confident that inflation is moving in the right direction."