Inflation Warning: Fed Underestimating Price Pressures, Economists Caution
To cut or not to cut: that’s what the Federal Reserve will begin to debate at its highly-anticipated meeting on Tuesday.
However, two economists have sent a warning notice to the central bank, cautioning they’re analyzing the wrong headline numbers.
"I think inflation is higher than what people are saying," former Federal Reserve Bank of Kansas City President and CEO Thomas Hoenig said on "Mornings with Maria" Tuesday, ahead of the meeting.
"If you use the CPI, which I think you should use, core [CPI] is still above three [percent], it's been above three for a year. So they ought to be cautious in coming down, as anxious as they are to please the markets and whomever else," he continued. "They should be much more careful because, as someone said, reversing themselves now would be a disaster. Thank God they had to raise it later. It'd be a mess."
MacroMavens’ matriarch economist and President Stephanie Pomboy agreed: "I think this is so important, the headline CPI numbers are sort of the ones to watch, and they're not particularly friendly for the Fed given the recent trend."
"Since Biden became president and the inflation numbers really took off in the beginning of 2021, the CPI was up 20%. Gold was up 30%," she further explained. "Just here in 2024, the CPI is up 1.6% and gold is up 20%. So either the CPI is vastly understating inflation, or gold is telling us that there's a lot more inflation coming."
After its last policy meeting in July, the Fed kept its benchmark federal funds rate steady at a 23-year-high range of 5.25% to 5.5% but opened the door to interest rate cuts if inflation continued to ease.
MonetaryMacro.com CIO Joseph Wang explains how an 'aggressive' Fed rate cut would impact the U.S. dollar on 'Making Money.'
Inflation data showed that price growth slowed to 2.9% year over year in July and last week's release of August data reflected a continuation of that trend, with headline inflation at 2.5% from a year ago.
Fed Chairman Jerome Powell has signaled that the Fed doesn't need to wait for inflation to reach the central bank's target rate of 2%, given the progress in slowing inflation, which peaked at 9.1% in June 2022. Markets expect the Fed to kick off a series of interest rate cuts this week that will continue in the months ahead, though there is debate over the size of the initial rate cut.
EY-Parthenon chief economist Gregory Daco outlines why the Fed will gradually cut interest rates and not get too aggressive on 'Making Money.'
"Real rates are still restrictive. If they move a quarter point, I don't think it necessarily is in the world because there'll still be a constraint on the economy, but I think getting into this 50 basis point and 75 basis point discussion is really unwise," Hoenig added.
"And if they take that up, I think that's their mistake… if they go 25 basis points, which I still think is the most likely, he will then say: we're willing to do more if necessary."
This article originally appeared on Fox Business.
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