Fed Governor Christopher Waller Just Said 21 Words That Could Challenge the Stock Market Through Year End

Investors looking for relief from inflation came away sorely disappointed on Nov. 10 when the October Consumer Price Index (CPI) reading came in higher than expected.

In October, the CPI rose 0.4% seasonally adjusted from the prior month, 0.1% higher than economists had expected. There was no year-over-year number reported because a government shutdown last October prevented the Bureau of Labor Statistics from collecting data at the time.

Excluding more volatile gas and energy prices, core CPI rose 0.3%, also 0.1% higher than economists had expected. For investors hoping to avoid a rate hike in the Federal Reserve's final meeting of the year, this is bad news.

For investors planning for a year-end rally, Fed Governor Christopher Waller just said 21 words that could challenge this narrative as well.

Image source: Getty Images.

Inflation is not slowing quickly enough

As has been the case all year, there is really no rhyme or reason to monthly labor reports or inflation data, which have bounced around, at times showing signs of inflation slowing and at other times showing hot inflation data.

The rate-setting Federal Open Market Committee (FOMC) has already hiked its benchmark overnight lending rate, the federal funds rate, once this year, and the market has been pricing in additional hikes through the end of 2027.

One thing that Fed Chair Kevin Warsh has discussed is the pace of inflation slowing, saying it must be moving toward the Fed's 2% goal "at sufficient speed."

Waller recently upped the ante regarding this goal. Speaking at an event in London recently, CNBC reported that Waller said he favors a rate hike in December, even if October inflation data came in softer than economists projected. But if the data came in higher, Waller said he would be willing to take things even further.

"In that case, I believe a 50 basis point hike in the policy rate should be considered at the December meeting," Waller said, adding that a quarter-point hike could put the Fed's credibility at risk.

US Consumer Price Index MoM data by YCharts

These 21 words could make it difficult for the market to rally in the remaining weeks of the year. Waller is only one of the 12 voting members on the FOMC, so just because he says he would consider a half-point hike in December, it does not mean one will materialize.

However, Waller has been part of the FOMC consensus at almost all meetings this year. His lone dissent came in January, when he actually wanted the FOMC to cut interest rates. So there is a chance that if Waller is saying this, other FOMC members may share similar sentiments.

Doubt may creep into the market

According to CME Group's FedWatch tool, which uses 30-day futures on the federal funds rate to assess the probability of a rate change, following the October inflation data, there was roughly an 85% likelihood that the FOMC would hike rates by a quarter point in December.

However, the likelihood of a half-point rate hike jumped to nearly 15%, from zero just one day earlier. Keep in mind these probabilities change frequently.

Now, the consensus is clearly a quarter-point hike, but if more members of the FOMC begin to speak like Waller, it will become difficult for the market to rally while a half-point hike remains in the cards. Such a move would significantly jack up borrowing costs for consumers and businesses and could lead to a risk-off environment.

Investors should continue to monitor key data prior to the FOMC's final meeting of the year on Dec. 9, which includes the reading of the October Personal Consumption Expenditures (PCE) Index, the Fed's preferred gauge for inflation, and the November jobs report.

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.