As the U.S. continues its reckoning with inflation, the Federal Reserve has not backed down.
“Members of the [Federal Open Market Committee] are saying they’re just as hawkish as they’ve ever been, and they’re going to continue to raise interest rates continuously until they get that rate of inflation down to 2%, which I don’t think they can do,” Hugh Johnson Advisors CIO and Economist Hugh Johnson told Yahoo Finance Live (video above). “Nevertheless, they’re very intent on doing it.”
Minutes from the most recent Federal Open Market Committee (FOMC) meeting, revealed on Aug. 17, indicated that officials agreed “there was little evidence to date that inflation pressures were subsiding.”
“They judged that inflation would respond to monetary policy tightening and the associated moderation in economic activity with a delay and would likely stay uncomfortably high for some time,” the report stated.
Inflation currently sits at 8.5%, which is a decrease from June’s 40-year high of 9.1%. The Fed has stated that its goal is to reduce inflation levels down to 2% by 2024 through rapid interest rate hikes.
“There’s still people talking about 75 basis points — I think it’ll be 50,” Johnson said about impending rate hikes for September. “And talking about 50 basis points in November, I think it’ll be 25. December, 25. They say they’re going to be as tough as they’ve ever been. I don’t think so. I think they’re going to come off of that; otherwise, they’re risking the same mistake that we see so continuously in financial market history. You’ll remember the word ‘overkill’ — you might hear that word again.”
‘You can either be humane or you can stick to your guns’
Historically, hiking interest rates has been a standard approach to tackling inflation, though the magnitude of recent rate hikes has been the strongest in years.
The Fed raised rates by 75 basis points in both June and July, with June’s increase being its largest single-meeting rate increase since 1994.
With the Fed’s hawkish moves in mind, Johnson is predicting that inflation will reach between 6.5% and 7% by the end of 2022 as key economic numbers have already softened and may become “materially lower than that” going into 2023.
“You’re not going to see employment numbers that are as good or as strong as we saw for the month of June and July,” Johnson said. “What you’re going to see is the numbers are going to be coming down and coming down pretty swiftly. So we’re going to have soft economic numbers. Now what I would like to see is that this gets reflected in Federal Reserve interest rate decisions.”
Leading economic indicators, like consumer spending and the housing market, have shown significant signs of slowing, which Johnson said puts the economy at a “real risk” of a hard landing, potentially throwing the U.S. into a recession.
“When they talk about the importance of a 2% inflation rate … you’re seeing very soft economic numbers, very soft inflation numbers on a month-to-month basis,” Johnson said. “What are you going to do? You can either be humane or you can stick to your guns. If you stick to your guns — and they’ve done this in the past over and over again — then obviously we’re going to have a risk of a very hard landing.”
Ethan is a writer for Yahoo Finance.
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