Last year, the Federal Reserve was criticized for a strategic blunder: it failed to raise interest rates when inflation hit a 40-year high.
The Fed is aggressively raising interest rates, bringing the federal funds rate to 3.25%, up from 0.25% a year ago, potentially pushing the US economy into recession.
Some pundits believe the Fed is making another strategic mistake.
Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School, told CNBC’s Halftime Report on Friday that the Fed made a mistake in raising interest rates after commodity and asset prices fell. He also criticized the Fed’s decision not to hike rates in 2021 as commodity prices soared.
The Fed could misread inflation again and try to correct one strategic mistake with another. But is it?
Sam Boughedda, a senior equities analyst at AskTraders.com, shared the same stance as Siegel. Boughedda believes the Fed made a mistake by not raising rates because she believes inflation is “temporary.”
Boughedda believes the Fed is now lagging the market.
“If inflation continues to ease, the Fed could raise rates on falling inflation, which in turn means they’re lagging unless they change direction quite sharply,” he told the International Business Times in an email. “Overall, we believe that the initial aggressive rate hikes were necessary to control rising inflation, but now the Fed should be concerned about a possible looming recession.”
Daniel Kern, chief investment officer at TFC Financial Management, noted that the Fed is in a tough spot, but that’s not entirely its own decision and the Fed will be forced to keep rates high for longer.
“Slow supply chain healing, Russia’s invasion of Ukraine and ill-timed fiscal stimulus compounded the impact of the Fed’s failure to stay ahead of the inflation curve,” Kern told IBT.
He sees the country’s central bank erring on the hawkish side until inflation falls to its traditional 2% target. But that shouldn’t last too long, because he, too, sees inflation already easing.
“The good news is that supply chains are recovering, demand is shifting from goods to services, and energy prices have fallen from post-invasion highs,” Kern said.
Kunal Sawhney, CEO of investor relations group Kalkine Media, sees the Fed walking a tightrope as its efforts to contain inflation quickly increase the odds of a prolonged recession. He points to the fall in commodity prices, including oil, which is trading at its lowest level since January, before the war between Russia and Ukraine pushed prices to record highs.
Sawhney is concerned about a lack of consumer demand caused by higher interest rates, leaving retailers stuck with larger-than-expected inventories as the holiday season approaches.
“Because of that, we may see discounted prices from them soon,” he said. “These indicators are pointing to lower inflation than the Fed’s projections, which means it may need to think more about its monetary policy.”
https://www.ibtimes.com.au/fed-may-be-misreading-inflation-again-1838863?utm_source=Public&utm_medium=Feed&utm_campaign=Distribution The Fed may be misinterpreting inflation again