The latest economic data released in the United States shows a smaller-than-expected decline in inflation, but economists say core inflation pressures and the strength of economic activity continue to pose risks.
Experts appearing on a CNBC discussion show predict that the Fed will be forced to abandon interest rate cuts and resume tightening measures.
Joe LaBonna, chief economist at SMBC, said the U.S. economy remains on a growth trajectory, retail sales are strong and unemployment claims remain extremely low, underscoring the tight labor market.
Recalling that the Fed eased monetary policy by 75 basis points last year due to job concerns, LaBorgna argued that those concerns are now unfounded and that the inflation outlook is far more uncertain and riskier than it was six or seven months ago.
“Throughout history, inflation has never magically returned to its target level as the economy grew above trend levels,” LaVogna said, adding that the Fed has no choice but to use its primary tool, the federal funds rate.
LaBorgna made a clear prediction: “In my opinion, the Fed has to raise rates. The Fed, led by Kevin Warsh, has taken this step and this rate hike will happen this year.”
Related news Cryptocurrency platform hacked, large losses reported, trading halted
Natasha Salin, a former Treasury Department official and professor at Yale Law School, agreed with LaVogna’s view and said recent comments from new Fed Chairman Kevin Warsh confirm this expectation.
Sarin referred to Warsh’s warning in Congressional testimony that we shouldn’t put too much weight on a single data point, such as lower-than-expected inflation data.
“Mr. Warsh has signaled a return to the ‘old Kevin Warsh’ profile we know, with a clear focus on inflation.”
Sarin also refuted the view held by some that monetary policy can be implemented using alternative instruments without touching interest rates. He said these alternatives are unproven and far from delivering results in the timeframe needed to combat inflation. Sarin added that the 2% inflation target has not been met since the pandemic, and that inflationary executive decisions such as tariffs are making the Fed’s job even more difficult.
*This is not investment advice.
