Recent inflation data ‘made me more comfortable’ about potential 50 bp hike in December

Federal Reserve Governor Christopher Waller said that recent inflation data makes him more comfortable with the idea of ​​raising rates 50 basis points at the central bank’s December meeting.

“Looking toward the FOMC’s December meeting, the data of the past few weeks have made me more comfortable considering stepping down to a 50-basis-point hike,” Waller said in a speech at an economic forum in Arizona, later adding: “If the FOMC were to step down to a 50-basis-point increase, it is important to remember that this would still be a very significant tightening action.”

Waller stressed that he won’t make a final judgment until he sees the next jobs report and the next price consumption expenditures report, which is the Fed’s preferred measure for inflation.

Waller noted that last week’s consumer price index report was a “very welcome” moderation in the pace of inflation, noting that the slowdown in October was widespread — specifically involving both a deceleration in services prices and the first decline in core goods prices since March. At the same time, he cautioned not to read too much into one report given that over inflation is still too high and that he’s looking for a continued slowdown in core goods prices.

Core CPI, which excludes volatile food and energy prices (the so-called core reading), rose 0.4% month over month, coming in below expectations of 0.5% and lower than the 0.6% rise seen in both September and August.

On an annual basis, core CPI rose 6.3%, compared with 6.6% in September, 6.3% in August and 5.9% in July. The Fed prefers to strip out food and energy prices since they can be so volatile.

Christopher Waller testifies before the Senate Banking, Housing and Urban Affairs Committee during a hearing on their nomination to be member-designate on the Federal Reserve Board of Governors on February 13, 2020 in Washington, DC. (Photo by Sarah Silbiger/Getty Images)

The Fed Funds Rate currently stands in a range of 3.75%-4%. As the Fed’s benchmark interest rate gets higher, Waller said the case for slowing the rate of ascend becomes stronger.

“This would correspond to slowing to 50-basis-point hikes,” Waller said. “At a certain point, policy will reach an optimal cruising altitude, but we don’t know exactly what that level will be because it depends on the data.”

Waller says the Fed’s policy rate should peak well before inflation reaches 2% since it takes months for the full effects of a rate increase to work through the economy. Monetary policy operates with a lag effect.

Waller says each decision the Fed makes in the coming months will be heavily influenced by the cumulative effect of the rate hikes made earlier this year.

Even as the Fed has raised by 3.75 percentage points this year, Waller says he believes the policy is “barely in restrictive territory” and that more interest rate hikes are needed to get inflation down.

“We still have a ways to go,” Waller said. “I expect that getting inflation to fall meaningfully and persistently toward our 2 percent target will require increases in the federal funds rate into next year.”

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