Tempted to jump back into the stock market? A top Fed official urges caution

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Fed Governor Waller says last week’s big rally was an ‘overreaction’

Last week's big stock market rally in response to tamer-than-expect inflation numbers may have many investors wondering if it’s safe to get back into the market. A top Federal Reserve official says no, it’s not.

In a speech over the weekend, Federal Reserve Gov. Christopher Waller said the Fed is nowhere near the end of its interest rate-raising cycle. He said the market “overreacted” last week when it rose about 8% on Thursday and Friday.

Stocks rallied across the board when the Consumer Price Index (CPI) came in slightly lower than expected, with many investors jumping to the conclusion that the slowdown might cause the Fed to stop raising interest rates. Waller says that’s the wrong conclusion.

At an investors conference in Australia, Waller answered a series of questions about the Fed’s campaign to bring down U.S. inflation. He said stock market investors should focus on a point at which policymakers stop raising rates, adding that the endpoint “is a ways off.”

"We're not softening,” Waller said. “Quit paying attention to the pace and start paying attention to where the endpoint is going to be. Until we get inflation down, that endpoint is still a ways out there."

Looking for ‘bargains’

Last week the stock market rallied off its recent lows as many investors scooped up beaten-down names among big tech and semiconductor stocks. But Waller says investors need to understand that the Fed’s work “has a long way to go.”

Noting that October’s 7.7% annual inflation rate is an improvement over the month before, Waller said 7.7% is still unacceptably high.

"We're going to need to see a continued run of this kind of behavior and inflation slowly starting to come down before we really start thinking about taking our foot off the brakes," Waller said.

Earlier this month Fed policymakers raised the federal funds rate another 0.75%. The Fed meets again in mid-December when it is expected to announce yet another rate hike.

Individual investors should do their own research and seek qualified, objective advice before making major financial decisions.

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