The Fed was too focused on easing and has stuck the US economy with higher prices, says Stifel’s chief economist

When the central bank stopped raising interest rates in July 2023, it may not have led to enough tightening of the economy, which is why inflation has not fallen to the Fed’s target levels, according to Stifel chief economist Lindsey Piegza.

“I think, as we’ve long argued, the Fed with this excessive focus on achieving easing stopped where we needed to be to ensure a return to price stability, not just sit back and hope for .but make sure you go back to 2%,” Piegza said CNBC Wednesday.

The Federal Reserve set out its dual mandate to lower inflation while maintaining full employment as the US economy struggled post-pandemic. At its peak in June 2022, inflation was at a 40-year high of 9%, while at the same time the labor market had largely recovered from the pandemic’s mass unemployment. Against this background, the Fed was laser-focused on so-called soft tapering – reducing inflation without the usual increase in the unemployment rate. That focus led to a cycle of rate hikes that still haven’t done enough to sufficiently reduce inflation, according to Piegza. In fact, she argues that the soft landing cannot happen until prices fall even further.

“We’re not there yet, because remember, part of the soft landing is the eventual return to price stability,” Piegza said. “We’re still well above the 2% target, really not confident yet that we’ll get back to that disinflationary trend.”

Persistent inflation has been a persistent problem for the Fed since the beginning of the year. Stifel’s position has been that the economy is still very strong and consumers are still willing to spend a lot in order for inflation to come down significantly. As far back as January, Stifel CEO Ron Kruszewski was skeptical that inflation had fallen enough for the Fed to start cutting rates, as many investors expected at the time.

“I’m not so sure that inflation has moderated completely,” Kruszewski said Yahoo News while participating in the World Economic Forum in Davos, Switzerland.

As the last mile of inflation remains stubbornly difficult to overcome, some Fed officials have begun to float the idea that the central bank may need to raise rates further instead of cutting them. That would mark a major reversal of market expectations, which started the year predicting as many as six rate cuts. Piegza, however, doesn’t think the Fed should raise rates.

“The Fed should not move the lever at this point, but do the work necessary to restore price stability to the previously indicated 2% level,” Piegza said. wealth in an email.

Potential rate hikes would require a drastic shift in the current trajectory of inflation, which according to the Fed’s preferred metric has hovered around 2.6% since the start of the year. For Piegza, a rate hike, which she still considers highly unlikely, would only come after six consecutive months of rising inflation data.

For now, the Fed has been clear that it is in a pattern of holding off on rate cuts (or hikes) until it gets more promising data on inflation. For her part, Piegza thinks the waiting game means there will be no tariff cuts in 2024.

“Inflation is still very sticky,” Piegza said. “The economy is still relatively solid. The consumer is losing momentum, but is still out of market spending. It will be very difficult for the Fed to justify a rate cut. They are on track for an eventual reduction, but look more and more like a 2025 event to me.”

In recent weeks, Fed officials have also cited the strength of the labor market as a reason to hold back on any interest rate changes. Federal Reserve Bank of Minneapolis President Neel Kashkari called the current low unemployment levels a “luxury” for the US economy. The latest data shows a labor market with fewer jobs compared to the post-pandemic peak. But even so, there were still more jobs than workers available to fill them.

“We’re continuing to see this idea that labor demand is still outstripping labor supply, perpetuating the notion of wage pressures and adding further uncertainty to that longer-term outlook for inflation that the Fed is desperate to get back to that target. of 2%,” said Piegza.

As Wall Street waits with bated breath for any hint from the Fed on its next moves, Piegza’s boss Kruszewski issued a warning from him that things could get worse. “Every hard landing starts with a soft landing,” warned Kruszewski.

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