Fed’s Waller says market has overreacted to consumer inflation data: ‘We’ve got a long, long way to go’

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

“It was just a data point,” Waller said during a conversation in Sydney, Australia, sponsored by UBS.

“The market seems to have gotten a head start on this one CPI report. Everyone should just take a deep breath, calm down. We have a ways to go,” Waller said.

Investors cheered flexible CPI printing, released on Thursday, sending shares soaring to their best week since June. The S&P 500 SPX index,
+0.92%
closed up 5.9% for the week.

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

Waller said it was good that there was evidence that inflation was falling, but noted that there were other times over the past year when it looked like inflation was falling.

“We’re going to see a continued streak of this type of behavior and inflation slowly start to come down, before we really start thinking about taking our foot off the brakes here,” Waller said.

“We have a long, long way to go to bring inflation down. Rates are going to keep going up and they’re going to stay high for a while until we see that inflation getting closer to our target,” he added.

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

Waller said “the worst thing” the Fed could do was stop raising rates just to blow up inflation.

The 7.7% inflation rate seen in October “is huge”, he added.

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

The central bank has raised rates by nearly 400 basis points since March, including four consecutive 0.75 percentage point hikes that were almost unprecedented before this year.

“We plan to move forward at rates of potentially 50 [basis points] at the next meeting or the next meeting after that,” Waller said.

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

At the same time, Powell said the Fed would likely raise rates above the 4.5% terminal rate to 4.75% it had previously forecast.

“The cue was ‘stop paying attention to the beat and start paying attention to where the end point is going to be,’” Waller said.

In the wake of the CPI report, investors trading in fed funds futures see the Fed’s terminal rate at 5%-5.25% next spring, then quickly falling back to 4.25%- 4.5% by November. This is well below levels prior to the CPI data.

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