Fed Watch: Waller Delivers

But you have to go deep into the Q&A to see why. THE key comment received zero coverage from key Fed watching media members.

Discussion

FED Governor Christopher Waller gave a speech at the Money Marketeers in New York at 6:45pm EST. It was reasonably hawkish versus the soft landing hysteria that’s overtaken the market since the days leading up to CPI - he said most of the policy tightening that’s been put in place has worked its way through the system (i.e. lags are shorter than they’ve been historically), and that September is a live meeting - but it wasn’t until deep into the Q&A that he delivered precisely what I anticipated earlier today: a pushback against the optimistic rates market pricing following a soft CPI print. If you have access to Bloomberg “LIVE GO”, starting around 1:15:42 he discusses optimistic market pricing and at 1:16:47 he says:

“I’ve watched this for the last year, and it’s just puzzled me how optimistic the market seems to be on good data, and not thinking ‘you know, this might not be permanent. They’re always pricing in these cuts. They’re just so optimistic. It’s been a bit of a puzzle, because I usually think of markets as being pretty efficient and smart.”

He then acknowledges the fact the 2-year UST note yield came down in response to CPI as a result of the market concluding “those two hikes” are off the table now. He said: “Ok, we’ll see.”

So, the dovish interpretation of this is that he didn’t try to convince the market that they’re wrong to price out those two cuts. He just said, “we’ll see.” But combined with Mary Daly’s unscheduled appearance, Waller’s comment was very much a direct pushback against overly optimistic market expectations.