Even after three U.S. banks went bankrupt this month due to higher interest rates, Harvard University economist Jason Furman believes the Federal Reserve should keep raising interest rates to keep inflation in check.
“There’s the macroeconomy, there’s the financial system. In the last three and a half weeks, we haven’t learned anything new about the macroeconomy that’s particularly reassuring,” he said. CNBC On Friday, he noted that inflation was still well above the Fed’s 2% target.
The economist, who also chaired the Economic Advisory Board under President Obama, said bringing inflation down from current levels to the all-important 2% figure would be a “really, really big job” without more rate hikes. claimed.
According to Furman, the banks’ recent troubles are doing at least part of the Fed’s fight against inflation by tightening lending to households and businesses, which weighs on demand, the labor market and ultimately consumer prices. “But at the moment it seems like it’s only part of the job, and the Fed itself will need to do more,” he added, but he added that there were no specifics. We did not outline our recommendations.
Over the past year, Fed officials have hiked interest rates faster than any other institution to combat last year’s 40-year high of inflation. However, since June, the rate of increase in consumer prices has been on a downward trend. And on Friday, the Fed’s favorite inflation indicator, the Personal Consumption Expenditures (PCE) index, fell short of expectations again, up 5% year-on-year last month compared with his 5.3% in January.
But Fuhrman argued that even in a downtrend, raising interest rates would ultimately be necessary to bring inflation down to the Fed’s 2% target. The current cut in interest rates may unwittingly “give investors a false sense of security” about inflation, which could surprise them later if rates have to be raised again. will be higher, he said.
“They need to monitor and be vigilant, but they should not actively refrain from changing interest rates out of fear of financial stability, as doing so could exacerbate the problem.”
The economist added that local banks “should avoid rate cuts unless the turmoil spills over into the financial system.”
Still, with inflation declining and banks facing volatility, many market watchers, including Jay Hatfield, CEO of investment manager Infrastructure Capital Management, said the Fed would raise rates again. I think it is a big mistake.
“They just make the problem worse,” Hatfield said. luck Friday. “On the other hand, if we cut interest rates, the situation will improve. We need to improve as soon as possible or we will see more bank failures.”
Hatfield has been a harsh critic of the Fed and economists who believe that unemployment must rise in order for inflation to fall. He points out that many central bank economists use what is called the Phillips curve to guide policy. The Phillips curve assumes a stable inverse relationship between inflation and unemployment.
“The Phillips curve busted with inflation in the 1970s and is still busting,” Hatfield said, arguing that it failed to consider the importance of energy and house prices. He believes that inflation has already fallen to acceptable levels, and further rate hikes are simply “choosing recession over inflation, which is the wrong choice, and which puts everyone at risk.” It will hurt,” he added.
Meanwhile, Bank of America chief U.S. economist Michael Gappen said he expects the Fed to raise another 25 basis points at its next meeting in May, even after favorable PCE data was released on Friday. stating that the investor has a “60% chance of that outcome.
“Beyond that, I think employment and financial stability concerns will be more important factors,” he said, arguing that the Fed will keep the benchmark rate at 5% to 5.25% for the rest of the year. bottom.
Comerica Bank chief economist Bill Adams also said that despite inflation trending lower, it was “still too high for the Fed’s liking,” making Powell’s job very difficult this year. It will be.
“The Federal Reserve’s next interest rate decision in early May is almost a toss-up,” he said. luck“Positive information such as layoff announcements and recent bank headlines suggest that a moratorium on rate hikes may be appropriate, but more negative information such as recent employment, consumer spending and inflation data suggests that Information supports another rate hike.”
