Fed’s Waller says markets overreacted to consumer inflation data: ‘We have a long, long way to go’

Federal Reserve Governor Christopher Waller said on Sunday that financial markets appear to have overreacted to October consumer price inflation data that was softer than expected last week.

“It’s just one data point,” said Waller, during a chat in Sydney, Australia, sponsored by UBS.

“The market seems to have found an exit ahead of this single CPI report. Everyone should just take a deep breath, calm down. We have many ways to go,” said Waller.

Investors cheered soft CPI print, released on Thursday, boosted shares to their best week since June. S&P 500 Index
+ 0.92%

closed 5.9% higher for the week.

The data showed that the annual rate of consumer inflation fell to 7.7% from 8.2%, marking lowest level since January. Inflation hit a near 41-year high of 9.1% in June.

Waller said it’s good to have some evidence that inflation is falling, but noted that there have been other times in the past year where it looked like inflation was falling.

“We’re going to see this cascade of behavior continue and inflation slowly start to come down, before we really start thinking about putting the brakes on here,” Waller said.

“We have a long, long way to go to reduce inflation. Rates will continue to rise and they will stay high for a while until we see this inflation drop near our target,” he added.

The Fed is focusing on how high interest rates need to be to bring down inflation, and that will only depend on inflation, he said.

Waller said the “worst thing” the Fed can do is stop raising interest rates just for inflation to explode.

The 7.7 percent inflation rate in October “was huge,” he added.

The Fed signaled in its last meeting earlier this month that it could slow the pace of rate hikes in its upcoming meetings.

The central bank has raised interest rates by nearly 400 basis points since March, including four consecutive 0.75 percentage points hikes that are virtually unprecedented this year.

“We are looking at moving at maybe 50 [basis points] at the next meeting or the next meeting after that,” said Waller.

The Fed will hold its next meeting on December 13-14 and then again on January 31-February 1.

At the same time, Powell said the Fed is likely to raise rates above the 4.5%-4.75 percent closing rate they had previously projected.

“The signal is to ‘distract attention from speed and start paying attention to where the end point will be,’” says Waller.

After the CPI report, investors who trade in funding futures see the Fed closing rates at 5%-5.25% next spring and then quickly falling back to 4, 25% -4.5% in November. This is much lower than pre-CPI levels.


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