The US Federal Reserve faces its biggest dilemma yet as mistakes from the past come back to haunt, warns the CEO of one of the world’s largest independent financial advisory, asset management and fintech organizations. The stark warning from deVere Group’s Nigel Green comes as US CPI data published on March 14 reveals that core inflation rose in February in the world’s largest economy.
Green says: “The headline CPI last month had risen by 6% from last year, down from the 6.4% pace recorded in January, as expected. However, core inflation which takes out volatile elements such as food and energy prices, jumped 0.5% on the month, and 5.5% on the year. This presents the biggest dilemma yet for the Fed.”
Nigel Green continues: “The US central bank has the unenviable task of trying to cool high inflation – which remains stubbornly high and with core inflation on the rise again – despite one of the most aggressive rate hike programs in the world, as well as maintaining financial stability, in the face of the second and third biggest bank failures in US history in recent days.
Time lag in monetary policies is very high. Economists estimate interest rate changes take up to 18 months to have the full effect. This means monetary policymakers need to try and predict the state of the economy for up to 18 months ahead.
“Now they need to roll higher rates to cool inflation, but these pumped-up rates could trigger yet more problems for the critical banking sector. Investors are increasingly concerned that the Fed’s overtightening now – when monetary policy time lags are notoriously long – could steer the U.S. economy into a recession,” adds Green.
The deVere CEO says “mistakes from the past come back to haunt” the Federal Reserve. We expect the central bank will remain hawkish. They will argue there’s not enough evidence to revise the hikes.”
“The Fed didn’t act quickly enough to tame inflation. They resisted raising interest rates from near-zero levels for most of 2021, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues. This all leads to sky-high inflation – and especially wage inflation,” Green notes.
The deVere chief also flags not bringing quantitative easing (QE) to an end sooner as another potential mistake made by the Fed. In 2022, the Fed brought an end to its QE policy, involving purchases of Treasury and mortgage-backed securities. QE was aimed at providing more liquidity to capital markets.
“Could QE have helped spur inflation as the increased money supply resulted in too much money chasing too few goods and services at that time?” he asks. Nigel Green concludes: “Mistakes of the past are coming back to haunt the Fed as they face their toughest decision yet at their next meeting on March 22.”