Posted on 10/04/2021 11:06:52 AM PDT by MNJohnnie
Wharton finance professor Jeremy Siegel said he thinks the Federal Reserve is underestimating the degree to which inflation will be a problem, likely forcing the central bank into a sharper pivot away from stimulus and potentially catching markets off guard.
Siegel, known for upbeat forecasts, made the gloomy prediction in an interview on CNBC on Oct. 1, saying he thinks “we’re headed for some trouble ahead.”
“Inflation, in general, is going to be a much bigger problem than the Fed believes,” Siegel said, adding that he believes the persistence of elevated prices is going to pressure the Fed to accelerate the process of rolling back the $120 billion or so of monthly purchases of Treasury and mortgage securities.
The Fed dropped rates to near-zero last year and embarked on its massive bond buying program to help the economy bounce back from the pandemic recession, a process that has also lifted financial asset markets. If surging inflation pushes the Fed to move faster than investors expect to withdraw the liquidity that has helped buoy stocks and other instruments, that could trigger down moves in risk assets, especially tech stocks, Siegel argued.
Siegel was bullish on value stocks and said he believes the shift toward cryptocurrencies like bitcoin as a perceived inflation hedge has left gold relatively cheap.
His remarks came on the heels of a Commerce Department report last week that showed inflation in August continued to run red hot.
The headline Personal Consumption Expenditures (PCE) index surged 4.3 percent over the year to a level not seen since 1991. Meanwhile, the Fed’s preferred inflation gauge, the so-called core PCE inflation index that excludes the volatile categories of food and energy, vaulted 3.6 percent in the 12 months through August—well above the Fed’s 2 percent target and also a historically elevated number.
Fed Chair Jerome Powell last week spoke of “tension” between inflation that is high and well above target and ongoing labor market slack, reflecting the Fed’s policy challenge of balancing its dual mandate of price stability and maximum employment. His remarks conjured up the specter of stagflation—a condition of slowing economic growth and fast-rising prices that bedeviled the U.S. economy in the 1970s.
Some economists have warned that surging energy prices are inflicting major damage to struggling supply chains, pushing up the risk of stagflation. Others have expressed concern that supply-side woes more generally could combine with ultra-easy fiscal and monetary policies and high debt ratios to spark a full-blown stagflationary crisis.
Republicans have been especially vocal in highlighting the inflationary risk of big fiscal spending.
Rep. Warren Davidson (R-Ohio), a member of the House Financial Services Committee, told NTD’s “Capitol Report” program in an Oct. 2 interview that he’s been warning of higher inflation for some time. He acknowledged that the initial CARES Act served as a useful measure in the early stages of the pandemic, but with further packages spending has become excessive and has exacerbated the inflationary pressures.
“Since then, Congress has continued to dump more money and more money on the problem,” said Davidson, who like his GOP colleagues, opposes the Biden administration’s $3.5 trillion spending package.
While Fed officials have struck a more cautious tone on inflation in recent statements, they maintain it’s a temporary phenomenon that will abate once supply-chain dislocations ease.
Powell said in remarks on Sept. 29 that he doesn’t anticipate the current surge in prices to “lead to a new inflation regime, in which inflation remains high year after year.”
At the same time, Powell expressed concern about future inflation expectations becoming unmoored, which could fuel the inflationary dynamic as people anticipate more price hikes and so demand higher wages in what becomes an upward spiral.
New York Federal Reserve Bank President John Williams said recently that consumer expectations for what the rate of inflation will be five years down the road “have barely budged” and they remain “well-anchored” at around the Fed’s 2 percent objective. He added, however, that there are upside risks and a “great deal of uncertainty” around the inflationary outlook.
The New York Fed’s most recent consumer inflation expectations survey showed that short-term (one year ahead) and medium-term (three years ahead) inflation expectations both rose to record highs. In August, consumers’ expectations for what inflation will be at the one-year horizon rose to 5.2 percent, while expectations for inflation in three years came in at 4.0 percent.
The Biden Democrats continue to fiddle while average American families burn.
Really! Inflation is a bigger problem than anyone thought? How incredible surprising. I’m shocked by such a turn of events.
The Biden Democrats ain’t fiddlin’ while America burns.
They’s lightin’ matches.
LOl!
True
I don’t claim to be a professor or economics guru but I can safely say inflation is a problem yet preventable.
Old Fed: Inflation is becoming a problem. So we must raise interest rates.
Modern Fed: Inflation is becoming a problem. But we cannot raise interest rates, as that would hurt Congress’s ability to keep on borrowing money. So let’s all pretend that there’s no inflation - at least until we can retire and collect our fat pensions.
I’ve made good money in the past paying close attention to what Jeremy Siegel is saying. The man is one of the best in the business.
Yeah, starting to interfere at our house.
Hi.
This is for DU denizens who read FR.
Inflation is a “hidden” tax. Inflation causes both a rise in prices and shortages.
If taxes are raised (income/capital gains), you cause more inflation and shortages.
The Fed will have no choice than to raise the Fed Fund rate. Otherwise the currency will be devalued
See Carter 1976-1980.
5.56mm
For inflation to happen three things must happen interest rates spike gold spikes dollar crashes. None has happened yet
All true. But usually rates are first. Once they go up that's the signal for gold to go up against the dollar.
This is the desired result. Debt can be paid back in cheaper dollars.
I took Dr. Siegel’s monetary policy class many years ago. He is a really smart guy. He used to say things like, “You remember back in the fourth grade when you were first learning calculus.” I think he did and thought everyone did.
No it does not. For interest rates to spike the US Fed, and other centeral banks, have to take action. The are refusing to take action because they are claiming “this is just transitory”
Gold is not going up because, as the article points out, cryptocurrencies are now a competitive investment with commodities.
This is not the 1970s. You cannot look at the old inflation gaguges and try to apply them to the modern world economy.
Fed can control overnight but not ten year
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