Fed too focused on soft landing, says Stifel economist

Investors may be interested in higher interest rates for more than two decades, but one economist says the Fed hasn’t raised rates enough — and we could be stuck with higher prices as a result.

When the Fed stops raising interest rates in July 2023, it may not lead to enough tightening in the economy, which is why inflation has not fallen below the Fed’s target levels, says Stifel’s Chief Economist Lindsay Bixa.

„As we have long argued, the central bank, which is so focused on achieving a soft landing, has stopped where we need to be to ensure a return to price stability, not to sit on the sidelines and hope for it, but to ensure a return to 2%,” Piexa said. CNBC On Wednesday.

The Federal Reserve was built on it Double mandate After the US economy struggled post-pandemic to reduce inflation, while maintaining full employment. At its peak in June 2022, inflation was at a 40-year high of 9%, while the labor market largely recovered from the pandemic’s mass unemployment. Against that backdrop the central bank has been laser-focused on so-called soft landings—lowering inflation without the usual spike in the unemployment rate. That focus has led to a cycle of rate hikes that still haven’t done enough to reduce inflation, Bixa says. In fact, he argues, the soft landing won’t happen until prices fall further.

„We’re not there yet because part of the soft landing is the eventual return to price stability,” Piexa said. „We’re still well above the 2% target, and there’s still no hope that we’ll return to that inflationary trend.”

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Persistent inflation has been a constant concern for the central bank since the start of the year. Stifel’s position is that the economy is still strong and consumers are willing to spend more if inflation drops significantly. Until January, Stifel CEO Ron Kruszewski was skeptical that inflation had slowed enough for the Fed to start cutting rates, as many investors expected at the time.

„I’m not sure that inflation will be completely controlled,” Kruszewski said Yahoo News While attending the World Economic Forum held in Davos, Switzerland.

Adamant about getting through the last mile of inflation, some central bank officials have begun to suggest that the central bank should actually raise rates further rather than cut them. This would represent a major reversal of market expectations, which started the year with many predicting Six fee reductions. However, Piegza doesn’t think the central bank should raise rates.

„The Fed should not move the goalpost at this point, but should do the work necessary to restore price stability to the previously indicated 2% level,” Piexa said. Good luck In an email.

Possible rate hikes would require a drastic change in the current inflation path, which has been 2.6% since the start of the year according to the central bank’s preferred metric. For Piegza, a rate hike, which he still considers unlikely, would come only after six consecutive months of rising inflation data.

For now, the central bank has made it clear that it is in a holding pattern on rate cuts (or hikes) until it receives more promising inflation data. For his part, Bexa thinks the waiting game means no rate cuts in 2024.

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„Inflation is still very sticky,” Piexa said. „The economy is still relatively solid. Consumers are losing momentum, but not yet at market expense. It’s going to be very difficult for the Fed to justify a rate cut. They’re on track to eventually cut, but increasingly that looks like a 2025 event to me.”

In recent weeks, central bank officials have cited the strength of the labor market as a reason to hold off on any changes in interest rates. Neil Kashkari, president of the Federal Reserve Bank of Minneapolis, called the current low unemployment a „luxury” for the U.S. economy. The latest data shows the labor market Fewer job opportunities Compared to the post-pandemic peak. Nevertheless, there were still more job openings than workers to fill them.

„We continue to see the perception that labor demand is still outstripping labor supply, which perpetuates the perception of wage pressures and adds further uncertainty to the longer-term outlook for inflation, as the central bank has intensified its return to that 2% target,” Bixa said.

As Wall Street waits with bated breath for any indication from the central bank about its next moves, Piexa’s boss, Kruszewski, issued a warning from him that things could get worse. „Every hard landing starts with a soft landing,” Kruszewski warned.

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