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In the last year, the Federal Reserve has faced criticism for a strategic mistake: it failed to raise interest rates as inflation reached a 40-year high.
The Fed is raising rates aggressively, bringing the federal funds rate to 3.25%, up from 0.25% a year ago, and potentially pushing the U.S economy into a recession.
Some experts think that the Fed is committing another strategic mistake.
Jeremy Siegel, a finance professor at the Wharton School at the University of Pennsylvania, told CNBC’s “Halftime Report” on Friday that the Fed’s erred in raising rates after commodity and asset prices dipped. He also criticized the Fed’s decision not to raise interest rates in 2021 when commodity prices were soaring.
The Fed could be misreading inflation again, trying to correct one strategic mistake with another. But is it the case?
Sam Boughedda, a senior stock analyst at AskTraders.com, took the same stance as Siegel. Boughedda thinks that the Fed made a mistake by not raising rates, believing inflation is “transitory.”
Boughedda thinks that the Fed is now lagging behind the market.
“If inflation continues to ease, the Fed could be raising rates into declining inflation, meaning, once again, they are lagging unless they change direction pretty sharply,” he told International Business Times in an email. “Overall, we feel the initial aggressive rate hikes were necessary to control soaring inflation, but now the Fed should be worried about a potential looming recession.”
Daniel Kern, Chief Investment Officer at TFC Financial Management, noted that the Fed is in a tough spot, but that isn’t entirely its own choice, and the Fed will be compelled to keep rates higher for longer.
“The slow healing of supply chains, Russia’s invasion of Ukraine, and ill-timed fiscal stimulus compounded the impact of the Fed’s failure to stay ahead of the curve on inflation,” Kern told IBT.
He sees the nation’s central bank erring on the hawkish side until inflation descends to its conventional target of 2%. But that may not take too much time, as 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 curb inflation quickly raise the chances of a prolonged recession. He points to declines in commodity prices, including oil, which is trading at the lowest levels since January, before the Russia-Ukraine war pushed prices to record highs.
Sawhney is concerned with a shortfall in consumer demand caused by higher interest rates leaving retailers stranded with bigger-than-expected inventory in the upcoming holiday season.
“Due to this, we may see discounted prices being offered by them soon,” he said. “These indicators point to lower inflation than the Fed’s projections, meaning it may have to give more thought to its monetary policy.”
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