Christopher Waller said he was prepared to dissent based only on the jobs report, but inflation has since become a bigger concern. He said he now expects labour force growth to be near zero. He said near-zero labour force growth changes the breakeven level of job growth. He added that zero job growth may be what keeps the unemployment rate stable, even if it does not seem “normal”.

Oil Prices And Core Inflation

Waller said if oil stays high for months, it can feed into core inflation. He said a high and persistent oil shock would not be transitory, and it cannot be ignored, so caution is warranted. He said he wants to wait and see how conditions develop before deciding on rate cuts later this year. He also said he does not think there is a need to consider rate hikes. Waller said structural inflation may be close to 2% now, but tariffs keep it higher. He said if tariff effects do not roll off by the second half of the year, it will be tricky, though market pricing has not shown de-anchoring of expectations. He said higher petrol prices could damage the consumer outlook, and some shocks could lead firms to cut labour. He also said there is no reason to make bank reserves scarce just to reduce the balance sheet, and proposals on reserve demand and balance sheet shrinkage warrant study and discussion.

Implications For Markets And Traders

It seems the path forward is a holding pattern, as inflation has become the primary concern again. While we don’t think rate hikes are on the table, the prospect of rate cuts later this year is fading. We need to wait and see how the data evolves before making any major policy decisions. The latest February 2026 CPI report, coming in at 3.4%, confirms this cautious stance and makes it difficult to justify easing policy. With WTI crude stubbornly holding around $95 a barrel due to ongoing geopolitical tensions, there’s a real risk this high energy cost will start pushing up core inflation. This kind of persistent oil shock is something we cannot simply ignore. Our view on the labor market is also shifting, as we now expect labor force growth to be near zero. This changes the math, meaning even a flat jobs report might be enough to keep the unemployment rate stable at its current 3.8%. This makes the monthly jobs number a much more sensitive indicator for potential wage inflation. We are making some progress on underlying inflation, but looking back at the situation in 2025, it’s clear the tariffs from the Trade Modernization Act are holding prices artificially high. If these tariffs don’t roll off by the second half of this year as expected, it will create a tricky situation. Market expectations for inflation to drop are heavily tied to this assumption. For derivative traders, this environment suggests playing for range-bound markets in the short term, but with an eye on volatility. Selling short-dated options on indexes like the S&P 500 could be viable, as the Fed seems locked in place for now. However, buying longer-dated volatility, perhaps through VIX calls or long-dated straddles, makes sense to hedge against a potential shock. The main risks are a sudden shock that forces companies to start cutting labor, or consumer confidence finally breaking under the weight of high gas prices. We saw consumer sentiment waver during the brief recession scare of late 2025, and it could happen again. Any sharp downturn in retail sales or consumer credit data would be a major red flag. Create your live VT Markets account and start trading now.

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