Although the latest economic data released in the US indicated a smaller-than-expected decline in inflation, economists say that core inflation pressures and the buoyancy of economic activity continue to pose risks.
Experts appearing on a CNBC discussion program predict that the Fed will be forced to abandon interest rate cuts and resume tightening measures.
SMBC Chief Economist Joe Lavorgna stated that the U.S. economy is maintaining its growth trajectory, retail sales are strong, and jobless claims remain extremely low, confirming the tightness of the labor market.
Lavorgna, recalling that the Fed eased monetary policy by 75 basis points last year due to employment concerns, argued that these concerns are now unfounded and that the inflation outlook has become much more uncertain and risky than it was 6-7 months ago.
“Throughout history, inflation has never magically fallen back to the target level in an economy growing at or above the trend level,” Lavorgna said, adding that the Fed has no choice but to use its primary tool, the federal funds rate.
Lavorgna made a clear prediction, saying, “In my view, the Fed has to raise interest rates. The Fed under Kevin Warsh will take this step, and this increase will happen this year.”
Natasha Sarin, a former Treasury official and Yale Law School professor, also agreed with Lavorgna’s views, stating that recent remarks by the new Fed Chairman Kevin Warsh supported this expectation.
Sarin, referring to Warsh’s warning in his congressional testimony that excessive significance should not be placed on a single data point (such as lower-than-expected inflation data), said the following:
“Warsh signaled that the Fed will use all the power at its disposal to fulfill its price stability mandate. With this stance, he shows a return to the ‘old Kevin Warsh’ profile we know, with his clear focus on inflation.”
Sarin also countered the view held by some that “monetary policy can be conducted using alternative tools without touching interest rates.” He stated that these alternative tools are both untested and far from yielding results in the timeframe needed to combat inflation. Sarin added that the 2% inflation target has not been approached since the pandemic, and that inflationary administrative decisions such as tariffs have made the Fed’s job even more difficult.
*This is not investment advice.
