Chairman of the Federal Reserve Jerome Powell testified before the Senate Banking Committee this week, and while his comments did not stray from the usual script, markets were spooked by his unwavering commitment to fighting inflation through interest rate hikes.
“The latest economic data is stronger than expected, suggesting that the ultimate level of interest rates is likely to be higher than expected,” he told senators, referring to January’s strength. employment report and signs of resilience consumer spending. The S&P 500 fell 1.5% after Powell’s speech and struggled throughout the week.
The Fed Chairman’s comments come after a battle with inflation that lasted more than a year, where Fed officials raised interest rates eight times in a bid to cool the economy. So far, their efforts have yielded mixed results. Year-on-year inflation, as measured by the consumer price index, fell from a peak of 9.1% in June to 6.4% last month. But Powell said this week that even if inflation wanes, the road back to the Fed’s 2% target is “likely to be bumpy.”
This means interest rates will have to be higher for longer, which is bad news for many investors, homebuyers and businesses. But Wharton professor Jeremy Siegel thinks the Fed chairman is making a mistake.
“I think Fed policy is very wrong and let me tell you why,” he said. said CNBC THURSDAY. “This month marks the third anniversary of the COVID crisis. During this period, wages increased less than inflation. It is difficult to say that wages are the cause of inflation when they have increased less than inflation.
Siegel noted that wages in the United States typically rise 1% to 2% faster than inflation. “Workers are way behind where they have been historically for the past three years,” he said.
From his point of view, median weekly real earnings in the United States, which explains the impact of inflation, fell by more than 7% between the second quarter of 2020 and the end of last year. And in January, real average hourly wages, which also take inflation into account, fell 1.8% year-on-year, according to the Bureau of Labor Statistics.
Yet in his testimony to Congress this week, Powell made it clear that he believes wage growth will have to be slowed to beat inflation.
“Wages affect prices and prices affect wages,” he said. “I think some easing of labor market conditions will happen – will happen as we try to get inflation under control.”
Siegel, on the other hand, argued that wages are rising due to a lack of available workers. In February, there were approximately 10.8 million Jobs in the United States, but only 5.7 million unemployed. Siegel thinks Powell is trying to fix this lack of labor supply by raising interest rates, but that just won’t work.
“It’s not the Fed’s job to offset a change on the supply side. They’re controlling aggregate demand. I think their focus on labor market tightness — suddenly, a one-man type of focus — is the wrong way to go about it,” he said.
Siegel argued that Powell should forgo raising interest rates in March, specifically by 50 basis points, and wait for the effects of previous rate hikes to trickle down to the economy and slow inflation. He pointed to the fading commodity prices, freight shipping ratesAnd housing market activity as evidence that Powell has already made progress toward his goal of price stability.
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