Investors may be frustrated by interest rates being the highest in two decades, but one economist says the Fed may not have raised them enough and could end up suffering from higher prices as a result.
The central bank’s decision to stop raising interest rates in July 2023 may not have tightened the economy enough, which is why inflation hasn’t fallen to the Fed’s target level, according to Stifel chief economist Lindsay Piegza.
“As we’ve long argued, I think the Fed has been overly focused on achieving a soft landing and hasn’t gone as far as it needs to to ensure a return to price stability — ensuring a return to 2 percent, rather than just standing by and hoping,” Piegza said. CNBC on wednesday.
The Federal Reserve Dual mission After the US economy struggled after the pandemic, the Fed’s goal was to lower inflation while maintaining full employment. At its peak in June 2022, inflation reached a 40-year high of 9%, while at the same time the labor market had mostly recovered from the mass unemployment caused by the pandemic. Against this backdrop, the Fed focused on a so-called soft landing, i.e., a fall in inflation without a sharp rise in unemployment. According to Piegza, this focus led to a cycle of interest rate hikes that still did not bring inflation down sufficiently. In fact, she argues that a soft landing cannot occur until prices fall further.
“We’re not there yet, and it’s important to remember that a soft landing also involves an eventual return to price stability,” Piegza said. “We’re still well above our 2 percent target, but we have no confidence yet that we’ll return to disinflationary trends.”
Lingering inflation has been a persistent issue for the Fed since the start of the year. Stifel’s position is that the economy is still too strong and consumers are willing to spend to bring inflation down significantly. Stifel CEO Ron Kruszewski expressed skepticism in January that inflation had fallen enough for the Fed to start cutting rates, as many investors expected at the time.
“I don’t think inflation is completely under control,” Kruszewski said. Said Yahoo!News Attending the World Economic Forum in Davos, Switzerland.
With inflation struggling to cross that final mile, some Fed officials have begun to float the idea that the central bank may need to raise interest rates further rather than lower them — a stark reversal of market expectations that had predicted up to $100 billion in inflation earlier this year. Six interest rate cutsBut Piegza doesn’t think the Fed should raise interest rates.
“The Fed should not change its goal at this point, but it should do the work necessary to restore price stability to its previously stated 2 percent level,” Piegza said. luck By email.
A potential rate hike would require a dramatic change in the current trajectory of inflation, which has been hovering around 2.6% so far this year according to the Fed’s preferred metric. Piegza believes a rate hike remains highly unlikely, but would only come after six consecutive months of rising inflation data.
For now, the Fed has made it clear it will hold off on any rate cuts (or hikes) until it sees more encouraging inflation data, but Piegza believes a wait-and-see strategy means no rate cuts will come into 2024.
“Inflation remains very strong,” Piegza said. “The economy is still relatively strong. Consumers are losing steam, but the market is still spending. It’s going to be very hard for the Fed to justify cutting rates. They’re going to cut rates eventually, but to me that’s increasingly likely to be in 2025.”
Federal Reserve officials in recent weeks have cited the strength of the labor market as a reason to hold off on rate changes. Federal Reserve Bank of Minneapolis President Neel Kashkari has called the current low unemployment rate a “luxury” for the U.S. economy. The latest data shows that the labor market is Decreasing number of job openings There are fewer job openings than there were in the post-pandemic heyday, but there are still more jobs than there are workers to fill them.
“The continued view that labor demand is outstripping labor supply perpetuates the notion of wage pressures and adds further uncertainty to the longer-term outlook for inflation as the Fed seeks to return to its 2 percent target,” Piegza said.
As Wall Street waits with bated breath for hints about the Fed’s next move, Mr. Piegza’s boss, Mr. Kruszewski, warned that things could get even worse. “Every hard landing starts with a soft landing,” Mr. Kruszewski warned.
