US Federal Reserve Governor Christopher Waller said on Sunday that financial markets appear to have overreacted to last week’s weaker-than-expected CPI data.
“It was just a data point,” Waller said in a UBS-sponsored call in Sydney, Australia.
“The market seems to have come a long way on this one CPI report. Everyone should just take a deep breath, calm down. We still have a long way to go,” said Waller.
Investors cheered the weak CPI print released on Thursday, which propelled stocks to their best week since June. The S&P 500 Index SPX, +0.92%, ended the week up 5.9%.
Data showed that the annual rate of consumer inflation fell to 7.7% from 8.2%, marking the lowest level since January. Inflation hit a nearly 41-year high at 9.1% in June.
Waller said it’s good that there are some signs that inflation is declining, but noted that there have been other times over the past year when it looked like inflation might be falling.
“We’re going to see an ongoing episode of this type of behavior and inflation that’s slowly fading before we really start thinking about taking our foot off the brakes here,” Waller said.
“We still have a long, long way to go to bring down inflation. Interest rates will continue to rise and will stay high for a while until we see that inflation getting closer to our target,” he added.
The Fed is focused on what interest 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 is stop raising interest rates just to let inflation skyrocket.
The inflation rate of 7.7% 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 the coming meetings.
The central bank has hiked rates by almost 400 basis points since March, including four consecutive hikes of 0.75 percentage points that were all but unknown before this year.
“We are aiming for a possible increment of 50 [basis points] at the next meeting or the next meeting after,” Waller said.
The Fed will hold its next meeting on December 13th and 14th and then again on January 31st to February 2nd. 1.
At the same time, Powell said the Fed is likely to hike rates above the previously expected 4.5% to 4.75% final rate.
“The signal was, ‘Stop paying attention to the pace and start paying attention to where the finish point is going to be,'” Waller said.
In the wake of the CPI report, investors trading Fed fund futures contracts see the Fed’s closing rate next spring at 5% to 5.25% and then rapidly to 4.25% to 4 by November. 5% falls behind. That’s well below levels prior to the CPI data.