Did Loretta Mester Just Become The Most Important Fed Official?

“It should go without saying that a CPI upside surprise would extend the current status quo of ‘short’ both bonds and equities, and keep feeding into volatility,” Nomura’s Charlie McElligott said Wednesday, a few minutes prior to the release of consumer price data for April.

Unfortunately for the Fed (and, more importantly, for Americans struggling to pay for basic necessities), April’s CPI report did indeed surprise to the upside.

Both the headline and core gauges topped estimates on an annual and monthly basis. Food prices rose a seventeenth consecutive month, and a decline in the gas price gauge was overshadowed by record high pump prices registered just a day earlier.

Read more: Fed, Voters Get Another Disastrous Inflation Report

The initial market reaction was predicable: Risk wavered, crypto suffered and the curve looked predisposed to bear flattening.

What comes next is less predicable because these are, as one bank put it a few days ago, “the most chaotic macroeconomic times in decades.”

But if you’re looking for clues as to the read-through of Wednesday’s inflation data for Fed policy, it’s worth contextualizing the numbers via Loretta Mester’s focus on monthly prints. On Tuesday, Mester said the following:

I would need to see monthly numbers coming down in a compelling way before I would want to conclude we could now rest.

That’s the opposite of what Wednesday’s data showed.

Core prices rose 0.6% MoM, in what I called “a cringe print.” The market expected a 0.4% rise (figure below).

Recall that March’s cooler-than-expected monthly core reading was the (shaky) pillar on which many market participants’ “peak inflation” stories rested. That pillar cracked on Wednesday.

As McElligott wrote, citing colleague Rob Dent, who last month adopted multiple 75bps Fed hikes as his base case, Mester is “emphasizing that declining YoY inflation by itself won’t be enough.”

Separately on Tuesday, Mester refused to rule out 75bps hikes. “We don’t rule out 75 forever, right?”, she asked, in response to a question from Bloomberg’s Michael McKee. “The cadence we’re going at now seems about right to me,” she continued, referencing 50bps increments. “We’re going to have to assess whether inflation is actually moving down.”

Wednesday’s data showed that it is moving down. On a 12-month basis. But on a monthly basis, which Mester told Reuters is what matters, it’s moving up. Again.

In the same remarks, Mester said it’s possible “excess demand” is squeezed out sooner than she anticipates, or that global supply chains normalize, but as it stands, she expects the Fed will need to move rates into restrictive territory in order to put enough pressure on the demand side to make a difference. Mester estimates neutral at 2.5%.

But even restrictive policy isn’t likely to do the trick. Or at least not anytime soon, she suggested. “I don’t think [inflation] will get back to 2% next year,” she told Reuters.