US ‘still has work to do in fight against inflation’, says FOMC member Christopher Waller

FOMC member Christopher Waller says the US Federal Reserve has plenty more work to do on inflation and investors needed to ‘calm down’.

FOMC member Christopher Waller said ‘we have a ways to go yet’ in the fight against inflation in the US. Picture: AFP

Christopher Waller says the US Federal Reserve has plenty more work to do on inflation.

At the UBS Australasia Conference in Sydney, the Federal Reserve Open Market Committee member said the lower than expected October CPI – which sparked the biggest one-day rise in US shares since April 2020 – was “just one data point” and investors needed to “calm down”.

The Fed would need to see “a continued run of this kind of behaviour … inflation slowly starting to come down before we can think about taking our foot off the brakes” on the economy, he said.

“As (Fed chairman Jerome) Powell said in his press conference, we’ve still got a ways to go,” Mr Waller said on Monday. “It’s really not so much about the pace any more, it’s where we end up.”

The so-called terminal rate of Fed funds would be “driven solely by what happens on inflation”, he said, adding food prices were coming down and there was some moderation in services prices.

“But we’ve got to see this continue before we stop (lifting rates), because the worst thing we can do is stop, and then it takes back off again and then you’re caught – that’s kind of what happened to us in 2021,” he said.

“It was starting to come down and then it exploded and we were caught flat-footed.

“Everybody should just take a deep breath, calm down. We have a ways to go yet.”

Mr Waller also conceded that the overall financial conditions were a key focus of the Fed.

“This was exactly the situation we got into in July, when chair Powell had done two 75-basis-point hikes in a row, and the market started to celebrate, for reasons I never quite understood,” Mr Waller said.

“This led to a loosening in financial conditions that we were trying not to do.

“So … there was a lot of hawkish comment, including the chair’s speech in Jackson Hole, kind of reminding people we’ve still got a ways to go … so 7.7 per cent CPI is enormous.

“We’ve still got a long, long way to go to get inflation down, and unless by some miracle it comes dropping off very rapidly – which I don’t think anybody expects – rates are going to keep going up and they’re going to stay high for a while, until we see inflation get down close to our target.”

Mr Waller noted that the level of market tightness in US jobs was the most it had been in a long time.

“We’re starting to see a little bit of softening in the labour market but we’re not seeing much,” he said. “The reality is the labour market in the US is still strong. We’re just not seeing the impacts of policy on the labour market from policy tightening I would have expected right now.

“The shocking part is, as much as we have raised rates in six months, you’re really not seeing much (impact) in the labour market. It still gives me some hope we can pull off a soft landing because of the resilience in the labour market, but by all indicators the labour market in the US is still strong.

“Pre-pandemic, if you had month after month of 200,000 jobs, you would think you’re in a roaring economy. Now we’ve got at least half a million jobs a month.” The cause of high US inflation was “a combination of demand and supply that hit all at once” and, while expecting these effects to fade along with the pandemic, Mr Waller said “we really worry about inflation expectations becoming unanchored”. He said: “It’s really critical we get inflation down and quickly if we can.”

Asked if the Fed might “break something”, he said it was hard to argue that, while rates weren’t restrictive and the labour market was so tight.