Fed Governor says latest inflation data was ‘disappointing’

Federal Reserve Governor Christopher Waller has called on policymakers to proceed cautiously with rate cuts after September’s “disappointing” inflation figures.
“The latest inflation data was disappointing,” Waller told an audience at Stanford University’s Hoover Institution.
“I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting,” he explained.
Although headline inflation cooled in September, certain price categories, such as food and shelter, remained stubbornly high.
The less volatile core inflation indicator, which strips away food and energy prices, accelerated from August. As macro strategist Charlie Bilello explained, September marked the 41st consecutive month that core inflation was above 3%.
Waller said that the Fed has made significant progress on inflation over the past 18 months but acknowledged that “at times it feels like a rollercoaster.” Because of that, Americans shouldn’t expect a repeat of the Fed’s jumbo-sized rate cut in September.
As Creditnews reported at the time, Waller was one of 10 Federal Open Market Committee (FOMC) members to vote in favor of the 50 basis-point cut. Now, it seems increasingly likely that the move was a one-off.
Proceeding with caution
The latest inflation report may have cemented the Fed’s strategy for the rest of the year.
According to CME Group’s FedWatch Tool, futures markets say there’s a 94.2% chance of a standard 0.25% rate cut at the central bank’s November policy meeting.
Last month, futures markets said there was a one in three chance that the Fed would pursue another 0.5% rate cut in November. Now, the odds of that happening are basically zero.
Expectations began to shift earlier this month after it was reported that U.S. employers added 254,000 workers in September, vastly exceeding forecasts.
Meanwhile, the Commerce Department’s final revision for second-quarter GDP showed the economy growing at a 3.4% annual rate.
The data “suggest that the economy is much stronger than previously thought, with little indication of a major slowdown in economic activity,” Waller said.
If Waller is correct, aggressive rate cuts could be counterproductive and lead to higher inflation—something economists have been warning about.
According to BlackRock, the combination of low interest rates and massive government budget deficits will drive inflation higher in the near term, which could complicate the Fed’s desire to continue lowering interest rates.
“We think inflation will prove sticky and could surprise the Fed like it did earlier in the year,” wrote BlackRock strategists Wei Li, Catherine Kress, and Christian Olinger.
In the meantime, Fed officials have stressed the need to be “data dependent.”
Minneapolis Fed President Neel Kashkari recently said he supported “modest reductions” in interest rates, but acknowledged that the decision will be based on economic data.
The next major report of consequence will be the October nonfarm payrolls, which is scheduled to be released before the presidential election.\
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