Roger Ferguson, former vice chairman of the Federal Reserve and former CEO of TIAA, joined CNBC’s ‘Squawk Box’ earlier Monday morning to discuss what he expects to come from the Fed.
What Happened: As the markets began to rally last week into Friday, based on the potential that the Fed may pivot in December, Ferguson said that he expects the Fed to raise interest rates by the benchmark of 75 basis points at the Nov. 2 Fed meeting.
Although depending on the data, Ferguson is expecting a 50 bps to 75 bps hike in the last Fed meeting of 2022, which falls on Dec. 14.
Furthermore, Ferguson thinks the rate hikes will continue into 2023, forecasting one or two more rate hikes at the beginning of next year.
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Why It Matters: Ferguson mentioned that “the market was wrong to get off to the races,” as the Fed will keep interest rates elevated once it is done hiking to stabilize and bring down inflation.
Pointing back to the summer rally, Ferguson reported that the market has had bouts of “hopeful and optimistic behaviors,” as there was talk of peak inflation and the Fed pivoting. Except investors are missing out on the big picture, which is that inflation is much higher than the Fed is comfortable with, Ferguson said.
This is why Fed officials will use their tools to bring inflation to a 2% target, and keep interest rates elevated until there are true signs it has stabilized, before pivoting their stance on interest rates.
The Fed will also be closely watching the equity markets. When the markets rally, it shows that “monetary policy is not being transmitted as much as the Fed would like,” the former vice chairman said.
The Last Word: The Fed was most likely not pleased with the rally last Friday, as Ferguson believes that the markets may not clearly understand that the Fed will use its tools until inflation declines, or they are misinterpreting the slowing of rate hikes as a “change of intention.”
Ferguson also added that if he was at the Fed, “I would be scratching my head a little bit, as to why it is so hard to keep equity markets understanding the intentions,” which could lead to a tighter monetary policy or more hawkish rhetoric in future meetings.
Photo: Courtesy of Gerald R. Ford School of Pu on flickr
