Fed governor Christopher Waller has said he is “more comfortable” about reducing the interest rate hike size to 50 basis points in December. However, he added that a half percentage point increase was still a “very significant tightening action.”
According to Waller, the October consumer price index showed a “very welcome” moderation of the inflation pace in the U.S. He also pointed out that the economic slowdown in October was widespread, encompassing declines in services prices and core goods prices.
The core CPI, which does not include food and energy costs, showed a month-to-month increase of 0.4 percent in October, against the initial prediction of 0.5 percent.
In the previous two months, August and September, the core CPI’s month-to-month increase was 0.6 percent. Data showed that October demonstrated the first core CPI decline since March.
Waller warned the public not to focus on only one report because the inflation rate was still too high. He explained that the Fed preferred jobs and price consumption expenditures reports as inflation indicators.
Waller said that the current unemployment rate of 3.7 percent was the lowest in 53 years. Typically, a lower inflation rate is indicated by a higher employment rate.
The federal funds target rate currently ranges from 3.75 to 4.0 percent. According to Waller, there is a pressing need to slow down the rate hike as the central bank’s benchmark interest rates grow higher. He added that although the Fed had raised the benchmark rate by 375 basis points in 2022, more hikes were needed to bring down inflation.
The Fed will consider every inflation report to see how effective the current policy is before making policy decisions. Waller expects the Fed’s monetary rate to peak before it hits two percent.
He reasoned that the economy requires months for the central bank’s monetary policy to show its full results. The current approach implemented by the Fed works with a lag effect.
San Francisco Fed chief Mary Daly echoed Waller’s statement about continuing the interest rate hike. She said that the Fed would incrementally increase the interest rates by at least 100 basis points.
On the other hand, Fed vice chief Lael Brainard said that the current Fed Funds Rate was already “high enough” to restrain the economy. Brainard added that the Fed should consider the risks of a recession as the rate continues to rise.
Effect on financial market
The U.S. stock market is heavily affected by investors’ expectations of the Fed’s policy movement in the coming months. Major indexes on Wall Street saw declines for two consecutive days after rallying last week.
A survey by CME Group revealed that 85 percent of investors predicted that the Fed would hike the benchmark rate by 50 basis points in the December FOMC meeting. About 50 percent of investors also said the Fed would slow the hike to 25 basis points starting in 2023.
Financial markets in other parts of the world also plunged on Wednesday, with major indexes in Europe and Asia reporting significant drops. Data showed that declines in tech company shares contributed significantly to the situation.