Federal Reserve Governor Christopher Waller has given markets a clearer map for the September policy decision, and Thursday's economic data make the path more complicated for the market.
In prepared remarks delivered at the Reuters Newsmaker Interview in Washington D.C., Waller said he is willing to support holding interest rates at their current level if August inflation continues to improve, but he would consider a rate hike if inflation comes in hot.
At the same time, weekly jobless claims remain low, and the latest trade data show a sharp increase in imports led by computers, computer accessories and semiconductors.
That combination leaves the Fed with an economy that is not showing obvious signs of breaking, even as inflation remains above target. For the markets, the issue is that a resilient economy can be good for corporate earnings but bad for rate outlook if it keeps monetary policy restrictive.
Waller's Reaction Function Is Now Explicit
Waller said the labor market is "stable" and in "satisfactory shape" and employment is near its maximum sustainable level, making employment data less important to his immediate policy decision than inflation. PCE inflation rose 0.2% in July, core PCE also increased 0.2%, while headline PCE was up 3.7% over the past year and core PCE was up 3.3%.
More importantly, Waller highlighted a substantial improvement in the recent inflation trend. Three-month core inflation through July was 3.05%, down from 4.76% in February. He said continued progress toward the Fed's 2% goal would make him comfortable holding rates, while a hot August inflation reading could push him toward a hike.
“If the incoming data for August show this improvement has been fleeting, then it may be appropriate to raise the policy rate when the FOMC meets on September 15 and 16.
That is a significant shift in the market's reaction function. A September hike is not Waller's base case; it is a conditional response to an inflation reversal.
But the threshold matters because Waller also believes current policy is only "slightly restricting" demand. That means he does not need to see a dramatic inflation resurgence before becoming comfortable with tighter policy.
Jobless Claims Give the Fed Room to Stay Patient
The labor market is providing little urgency for the Fed to ease.
Initial claims rose by 2,000 to 206,000 in the week ended August 29, slightly above the expected 205,000, while the four-week moving average increased 1,500 to 207,250. Insured unemployment rose to 1.779 million for the week ended August 22, but remained well below the 1.937 million level from a year earlier.
The message is straightforward: layoffs remain contained.
That matters because a rapidly deteriorating labor market could force the Fed to prioritize employment over inflation. The claims data provide no such signal yet. Instead, they reinforce Waller's argument that policymakers can afford to wait for more evidence on inflation before changing course.
For the Nasdaq E-mini futures (NQ), that removes one potential source of support. If employment were deteriorating rapidly, traders could look through sticky inflation and price faster easing. With claims still relatively low, the market has less reason to assume the Fed must cut.
The Trade Data Add an AI Twist
The July trade report introduces another important piece of the puzzle.
The U.S. goods and services deficit widened to $88.6 billion in July from $71.2 billion in June, a 24.4% increase. Imports climbed $10.8 billion to $399.3 billion, while exports fell $6.6 billion to $310.7 billion. The goods deficit alone increased $17.6 billion to $119.6 billion.
But the composition of imports is more interesting for NQ than the headline deficit.
Goods imports rose $11.4 billion, with capital goods jumping $14.4 billion. Computers increased $6.9 billion, computer accessories rose $6.6 billion and semiconductor imports increased $1.2 billion.
That is another sign of the enormous investment cycle surrounding artificial intelligence.
It also intersects directly with Waller's inflation concerns. He specifically identified technology-goods prices related to the AI buildout as an upside inflation risk.
The same AI boom is therefore producing two opposing effects: it is driving investment and supporting growth, but it could also contribute to higher technology-goods prices and make the Fed's inflation fight more difficult.
The Trade Deficit Is Not Automatically Bearish for Stocks
The widening deficit should not be interpreted as a simple negative signal for the economy or NQ.
Imports can rise because domestic businesses are investing heavily in equipment, technology and productive capacity. The surge in capital-goods imports, particularly computers, computer accessories and semiconductors, is consistent with companies spending aggressively on the infrastructure required for the AI economy.
The problem for markets is the timing.
If those imports reflect an investment boom, they support the growth side of the economy. But if the investment boom also keeps technology prices elevated, it can complicate the inflation side of the Fed's mandate.
That is exactly the kind of cross-current that can keep NQ volatile: strong AI spending supports earnings expectations while simultaneously making the rate outlook less friendly.
Friday's Jobs Report Still Matters
The next major test is the August employment report.
Waller said he expects employment data to remain broadly consistent with recent trends and that his policy decision will be heavily influenced by August inflation.
That does not make Friday's jobs report irrelevant. A major upside or downside surprise could alter the market's assessment of how much pressure the Fed faces to respond to labor-market conditions.
The most bullish combination for NQ would be a cooling labor market without a renewed inflation surge. That would strengthen the case for holding or eventually easing rates while avoiding a sharp deterioration in economic growth.
The more difficult combination would be resilient employment, sticky inflation and elevated energy prices. That would keep the possibility of a September hike alive and maintain pressure on Treasury yields and long-duration technology stocks.
