The Fed is embarrassed about its inflation mistake and will likely go too far in raising interest rates, former Fed president says

• The Fed blew it on inflation and it will likely hike interest rates too far, according to former Fed President Richard Fisher.
• Central bankers have signaled they will raise rates past 5%, with a possible 25- to 50-basis-point hike in February.

The Federal Reserve is embarrassed about its inflation mistake, and central bankers will likely go too far in raising interest rates, according to former Dallas Fed President and Barclays senior advisor Richard Fisher.

"The Fed does not want to do two errors in a row," Fisher said in an interview on CNBC on Tuesday. "They blew it on the transitory argument. They're embarrassed by it. And the last thing they want is to make a second mistake, which is to stop too soon. And are they likely to go too far? Yes."

That comes after the central bank aggressively hiked rates by 425 basis-points last year in order to rein in inflation, a move that's weighed heavily on stocks and sparked fear that the Fed could overtighten the economy into a recession.

Largely, that fear stems from the fact that Fed officials waited too long to fight inflation, as central bankers had described rising prices as "transitory" throughout 2021. That prompted the Fed to take even more aggressive monetary policy than needed, according to top economist Mohamed El-Erian, with interest rates now at their highest level since the 2008 recession. Central bankers also can't afford to dial back rate hikes prematurely, as that could cause inflation expectations to spiral out of control.

On Monday, San Francisco Fed President Mary Daly and Atlanta Fed President Raphael Bostic signaled the central bank would hike by 25- to 50-basis-points at its upcoming meeting and will likely take rates past 5% – which could mean more bad news for stocks, Fisher warned, adding that he didn't know if the market had "fully discounted" rates that high just yet.

Other market commentators have warned of more pain to come as the Fed continues to raise interest rates in 2023. Billionaire investor Ray Dalio said interest rates past 4.5% would likely spark a major recession and cause stocks to lose 20%. JPMorgan CEO Jamie Dimon warned that interest rates could even approach 6% to successfully bring down inflation, and previously predicted a similar drop in the stock market.

The Fed funds rate is currently 4.25%-4.5%. Central bankers are expected to discuss their next policy move from January 31-February 1, and traders are pricing in a 78% chance that officials raise rates another 25-basis-points, according to the CME FedWatch tool.