Joseph Stiglitz thinks further Fed rate hikes could make inflation worse

Federal Reserve officers have spent the final week indicating rate hikes will proceed so as to carry down rising costs — however this dangers intensifying inflationary pressures, in keeping with a Nobel Prize-winning economist.

“The real worry in my mind is, will they increase interest rates too high, too fast, too far?” Joseph Stiglitz informed CNBC’s Steve Sedgwick Friday on the Ambrosetti Forum in Italy.

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The Columbia University professor, writer of “The Price of Inequality” and “Globalization and Its Discontents,” mentioned that whereas there did should be an adjustment from the zero or near-zero curiosity rate coverage that has prevailed since 2008, there have been three causes an aggressive Fed course could stoke inflation.

The first is that the overwhelming supply of inflation, by Stiglitz’s evaluation, is supply-side disruptions resulting in larger costs in oil and meals, even inflicting a scarcity of child formulation.

“Will raising interest rates lead to more oil, lower prices of oil, more food, lower prices of food? Answer is clearly not. In fact, the real risk is it will make it worse,” he informed CNBC on the financial convention held on the shores of Lake Como.

“Why? Because what we need to do is to make investments to relieve some of these supply-side bottlenecks that are causing such havoc on our economy. It’s going to make it more difficult.”

The second motive, Stiglitz mentioned, was evidenced by the truth that margins for main firms have been rising together with their enter prices.

“They’ve not only been passing on the cost but passing it on even more. There’s a well-defined theory that points out that when interest rates go up, firms … take more advantage of raising prices today.”

“So raising interest rates in non-competitive markets may lead to even more inflation,” he mentioned.

Finally, he continued, there may be the potential for rising prices in an essential part of inflation: housing.

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“You raise interest rates, it gets reflected in rents, and there’s a Federal Reserve study showing that,” he mentioned.

The Federal Reserve raised its benchmark rate by 0.75 proportion factors in each June and July.

In a speech on Aug. 26, Fed Chair Jerome Powell mentioned that whereas larger charges, slower progress and softer labor market circumstances would carry down inflation, that will additionally imply “some pain” for households and companies.

Stiglitz had further considerations concerning the U.S. economic system’s impression on residents.

One was that rates of interest will proceed to be raised sooner than home costs fall — “prices are remaining high, they’re not going to come down as fast as interest rates are going up and that’s going to increase the intergenerational divide in our society,” he mentioned.

Another was that latest U.S. job market information, which on Friday confirmed nonfarm payrolls rose by 315,000 in August regardless of slowing financial progress, doesn’t point out as a lot energy as some have advised.

“One indicator that they are not really capturing is what is going on with real wages, which normally go up when labor markets are tight,” he mentioned.

Real wages refers to wages adjusted for inflation.  

“Labor markets are very tight, prices of goods are going up, that should mean you compensate workers even more but that’s not happening,” Stiglitz famous.

“Real wages are going down, so that at least should make you worry,” he added.


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