A trader works on the floor of the New York Stock Exchange (NYSE) as a screen showing Federal Reserve Chairman Jerome Powell during a news conference following the Fed rate announcement, in New York City, US, July 27, 2022.
Brendan McDermid | Reuters
The US Federal Reserve It could be forced off the path of sharp rate hikes in three phases, according to author Nomi Prins.
Markets expect the central bank to raise 75 basis points in a row at its monetary policy meeting later this month, the fastest pace of monetary tightening since policymakers began using the federal funds rate as a key policy tool in the early 1990s.
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Several Federal Reserve officials reiterated The FOMC’s commitment in recent weeks to curb inflation, but Prins told CNBC on Tuesday that accelerating interest rate hikes to calm markets was disconnected from the economic reality many face.
“This period of rate hike acceleration that we’ve seen so far has affected the real economy because it has reduced borrowing costs… for real people, real consumers,” she said.
“While for the street in general, money has historically been cheap and leverage is still high in the system, the Fed’s book is still just a touch below $9 trillion, which is double what it has been during the pandemic, and since the 2008 financial crisis.”
Despite broad market expectations for a further 75 basis point increase, Prins – a global economist and outspoken advocate of economic reform – said the Fed is likely to move away from its hawkish path in three phases with a disconnect between wealthy investors, institutions and the “real” economy.
After first lowering the pace of interest rate hikes to 50 basis points and then neutralizing the policy, Prins expects the Fed to begin to reverse course and become “accommodative,” with the US already reporting two consecutive quarters of negative GDP growth.
“Whether this is to cut interest rates or to increase her book volume again, is still unknown,” Prins added.
Inflation has soared worldwide due to supply chain bottlenecks in the wake of the Covid-19 pandemic, supply shutdowns in China due to repeated lockdowns, and Russia’s invasion of Ukraine causing food and energy prices to soar.
Central banks have argued that strict action is needed Preventing inflation from becoming ‘entrenched’ In their economies, they have been particularly wary of consumer price inflation fueled by wage inflation, which they expect may lead to increased demand, and thus higher prices.
In his speech in Jackson Hole Economic Symposium In late August, Federal Reserve Chairman Jerome Powell responded to market concerns about an impending recession caused by tightening monetary conditions by emphasizing that “some pain” for the economy would be necessary in the fight against inflation.
Prins argued that targeting wage inflation when wage increases fail to keep pace with broader inflation was a mistake.
“I think the Fed is completely missing this connection between what happens to real people in the real economy and why, and how that relates to the overall inflation picture, which it has set itself up to fight. There is just a mismatch here,” she said.
She said that central banks’ raising interest rates as their main tool to fight inflation had created a “gap” between individuals and institutions who were able to tap themselves into markets when borrowing costs and rates were much lower, and the average consumer.