Federal Reserve Governor Christopher Waller warned against "fighting the last war" on inflation while acknowledging rate hikes remain possible if price pressures persist. In a New York speech, Waller said inflation has broadened beyond energy and tariffs, citing artificial intelligence demand as a stubborn driver keeping prices above the Fed's 2% target.

Waller referenced the 2021 and 2022 policy errors of responding too slowly, but cautioned against overcorrecting. "The desire to avoid past mistakes is often the author of new ones," he said. He outlined two favorable factors: a strong labor market not fueling inflation and well-anchored inflation expectations, though warned complacency is dangerous.

The governor highlighted tariffs, Middle East energy prices, and AI "spillovers" as current inflation roots. His remarks precede Tuesday's CPI release, where economists forecast headline inflation falling to 3.8% annually from 4.2%, and core to 2.8% from 2.9%. Waller said he'd need several months of lower core readings before feeling confident.

The Federal Reserve meets in late July, with markets pricing a 39% chance of a rate increase per CME Group. Waller indicated he'd hold rates steady if inflation trends improve, but emphasized tighter policy may be needed "in the near term" if price pressures accelerate.