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 last week’s weaker-than-expected October consumer price inflation data.

“It’s just a data point,” Waller said in a UBS-sponsored talk in Sydney, Australia.

“The market seems to be way ahead in this CPI report. Everyone should take a deep breath and calm down. We still have a long way to go,” Waller said.

Investors cheered Thursday’s weak CPI data, pushing stocks to their best weekly performance since June. S&P 500 SPX,
+0.92%
It closed the week up 5.9%.

Consumer inflation fell to an annualized rate of 7.7% from 8.2%, the lowest since January, the data showed. Inflation hit a near 41-year high of 9.1% in June.

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Waller said it was good that there was some evidence that inflation was falling, but noted that at other times in the past year, inflation appeared to be falling.

“Before we really start thinking about stopping here, we’re going to see this behavior continue to run and inflation start to slowly come down,” Waller said.

“We still have a long way to go to bring inflation down. Rates will continue to rise and remain elevated for some time until we see inflation close to our target,” he added.

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

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Waller said the “worst thing” the Fed can do is stop raising rates, only to cause inflation to explode.

He added that October’s 7.7 percent inflation rate was “huge.”

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

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

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

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The Fed will hold its next meeting on Dec. 13-14, and then again Jan. 31-February. 1.

At the same time, Powell said the Fed is likely to raise interest rates above their previous forecast of a final rate of 4.5%-4.75%.

“The signal is ‘stop focusing on speed, start focusing on where the end is,'” Waller said.

Following the release of the CPI report, investors trading fed funds futures contracts expected the Fed’s terminal rate to be 5%-5.25% next spring, before falling back quickly to 4.25%-4.5% in November. This is well below the level before the CPI data.

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