Expert: The US Federal Reserve acted too late
Inflation situation more dramatic than expected
John Mauldin, financial expert and analyst, is quite critical of the inflation situation. In an article in Advisor Perspectives, the market expert also explains the dilemma facing the US Federal Reserve.
Did the Fed react too late?
High inflation rates have put currency holders around the world on red alert. The US Federal Reserve has long since started to raise interest rates and recently even dared to make a big jump in interest rates. The Swiss National Bank, the SNB, also surprisingly advanced and raised the key interest rate, an interest rate hike by the European Central Bank ECB at the next official meeting of monetary authorities has been announced and is considered as a fait accompli.
But the monetary authorities are on the right track: while raising interest rates is seen as a proven way to combat soaring consumer prices, it also carries the risk of a recession. Financial expert John Mauldin also sees this dilemma, as he states in an article for Advisor Perspectives. In retrospect, Mauldin even believes that the Fed started raising interest rates far too late. “My personal opinion – admittedly with hindsight – is that inflation was already out of control before the debate even started,” writes the market professional. He said monetary policymakers “should have resumed their ‘normal’ policies in late 2020 or early 2021 when vaccines were mitigating the impact of COVID. They could have lifted 25 points per meeting and cut QE by $10 billion,” he said. continued Mauldin. If the US Federal Reserve had acted sooner, it would have more options today. But now they have no choice but to throw themselves into inflation.
Fed Chairman Jerome Powell is consciously taking the risk of a recession, even though he was recently convinced that the US economy was strong enough to withstand interest rate hikes. However, a recession remains a possible scenario: “It’s definitely a possibility. It’s not the outcome we want, but it’s definitely a possibility,” said the top currency holder in the United States.
Situation worse than in the 1970s?
However, Mauldin does not believe that the Fed’s actions will be able to contain inflation in the near future, they were taken too late for that. “I think inflation is not expected to come down from its current high levels until next year.” [die Inflation, Anm. d. Red.] will come in waves of varying intensities, as happened in the 1970s, but the general trend is established,” said the somewhat optimistic financial expert.
In fact, he sees signs that the current situation could be even worse than it was in the 1970s. Although the graphs showing the consumer price index show that inflation is currently well below from its peak, the data situation is different today. If you look at the evolution of consumer prices in the four categories over which a typical household has little control, namely energy, gasoline, groceries and electricity, you can see that inflation is already “uncomfortably close to the misery of the late 1970s”. Improvement is not in sight in the foreseeable future.
Other basis of calculation
Economist Larry Summers agrees, co-authoring a study that found current inflation is closer to 1970s levels than most people think. It is particularly important to “compare apples to apples”, writes Mauldin in this regard. Specifically, it is the calculation of housing costs in consumer prices. Until 1983, the cost of buying a house with a mortgage was included in the calculation. Now, housing costs are calculated based on the value a landlord would have to pay to rent their own home. The study concludes: “In the 1970s and early 1980s, soaring interest rates made headline inflation appear higher because higher mortgage rates raised the cost of buying ‘a house.
The authors of the study therefore conclude that “current inflation, in particular core inflation, is significantly closer to previous peaks” than official figures indicate. “Official core inflation peaked at 13.6% in June 1980, while we estimate that core inflation for the same month was 9.1%, given the way in which the costs of housing were included in 1983 was significantly higher than originally reported”.
It remains to be seen whether the US monetary authorities will actually manage to curb the current inflation rate with their measures or whether the peak in consumer price inflation will only be visible next year, as Mauldin asserts. In May, US inflation surprisingly soared to 8.6% – officially the highest level since 1981. New inflation data for June is due within days.
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