The Federal Reserve’s rate hike on Wednesday in its attempt to stem high inflation has been hotly debated, with some economists and investors welcoming the decision to raise borrowing costs again and others arguing it will be harmful.
JP Morgan Asset Management’s chief global strategist with over 20 years’ experience is in the camp of Fed critics.
In an interview with CNBC on Wednesday, shortly after the Fed announced its 75 basis point rate hike, David Kelly said the US economy has “one foot in the grave” and the other on a banana peel.
“It really looks like it could be pushed into a recession and I just don’t see a reason for it,” he added. “If inflation is going down slowly, let it go down slowly.”
Kelly said 9% inflation was “absolutely unbearable” but he believes those days are behind us. Inflation fell to 8.3% yoy in August, from 8.5% in July and 9.1% in June. Despite the decline, the consumer price index rose 0.1% in August compared to July.
“I think they just want to sound hawkish,” Kelly said, referring to the Fed’s aggressive forecasts for future rate hikes. “I’m trying to figure out what I’m so afraid of here.”
He says projected rate hikes of 75 basis points in November, 50 points in December and possibly 25 points early next year will take the federal funds rate to 4.25% or 4.5%. He said the economy could not sustain such increases, citing a strong dollar affecting the country’s exporters, would-be homebuyers being “pushed out” by high mortgage rates and the general strain on the economy.
Before the Fed announced its rate hike on Wednesday, Kelly, like many economists, accurately predicted in an interview with CNBC that it would be a 75 basis point hike, adding that the Fed’s path was “too much”. .
“This economy is slowing down to a crawl,” he said. “Inflation will roll over anyway, maybe not as fast as the Fed would like. But I think the Fed is in serious danger of pushing this economy into recession by being more hawkish than it needs to be right now.”
Meanwhile, others like former Treasury Secretary Larry Summers tweeted that the Fed’s move was “good to see” on Wednesday along with slower growth and higher unemployment. Although he said we were “far from over the hill”.
He also praised the Fed’s “determination to disinflation” and hoped it would “do what is necessary to curb inflation,” which he suspects is gripping the economy more tightly than you might realize.
However, Summers was somewhat critical of Fed Chair Jerome Powell.
“Chairman Powell is very thoughtful at press conferences, but I wonder if the Fed’s credibility is well served by frequent hour-long dialogues about hypotheses and the unpredictable against a backdrop of volatile markets,” he wrote, adding, “between press conferences and dot plots.” and protocol the @federalreserve should consider the idea of TMI.”
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