Harvard Professor Rogoff Says Fed Won’t Have It Easy Keeping Inflation At 2% In ‘Changed World’

Minister of Foreign Trade of Costa Rica Manuel Tovar speaks during a press conference to present the organisation's updated global economic outlook, in Paris, on June 7, 2023. The OECD slightly raised its growth outlook for the world economy on June 7 as inflation eases and China has dropped Covid restrictions, but it warned the recovery faces a long road. The Paris-based organisation forecast an economic expansion of 2.7 percent, up from 2.6 percent in its previous report in March, with upgrades for the United States, China and the eurozone. AFP/BENZINGA

Former International Monetary Fund chief economist and Harvard University professor Kenneth Rogoff reportedly said the Federal Reserve will have trouble limiting inflation at 2% but noted he doesn’t expect the apex institution to abandon that target.

“I don’t think the Fed is going to have [an] easy time navigating keeping inflation down to 2% in this changed world,” he said, according to a Bloomberg report.

The US Federal Reserve in Washington, DC, on June 8, 2023. (Photo by Mandel NGAN / AFP) (Photo by MANDEL NGAN/AFP via Getty Images) 

Rogoff also believes interest rates may be headed higher in the times to come and expects the yield on the 10-year Treasury note to average above 4% for the rest of the decade.

“Real interest rates are going to be higher and probably inflation’s going to be higher,” he said adding that one could certainly see a nominal rate “that could be north of four for the 10-year rate through the decade.”

After breaching the 4% mark in early March this year, the 10-year U.S. treasury yield has so far managed to stay below that level.

The U.S. has yet to see interest rates fall below 4% as the other foreign central banks have risen their interest rates.

Market participants are keenly awaiting the release of inflation data along with the Federal Reserve’s policy decision next week.

A graph illustrates the rising cost of living as interest rates were today forecast for a further increase. (Photo by Chris Ison – PA Images/PA Images via Getty Images) 

It is coming at a time as the debt ceiling was raised preventing a debt default that would have caused a catastrophic economy in history of the United States. 

President Joe Biden and Speaker of the House Kevin McCarthy (R-Calif.) agreed on the debt ceiling that came down to a compromise.

Congress and the White House did not see eye-to-eye for months prior to the urgency of raising the debt ceiling.

Wall Street is expected to hang on to every word coming from the central bank for potential clues regarding its future policy path. Equity markets, however, have not shown any signs of panic so far.

According to the CME FedWatch Tool, traders are factoring in a status quo policy in June with an 81.7% probability the central bank will not hike rates this time.

This summer is expected to see higher prices that will hurt the average consumer in all sectors of the economy as Americans are expected to travel.

A pre-owned car sticker is seen on a vehicle at a CarMax dealership on June 07, 2023, in Austin, Texas. Wholesale used vehicles have reached their lowest prices of the year as sales have fallen amongst inflation and high interest rates. BRANDON BELL/BENZINGA

Interest rates have hurt the average in order to purchase a vehicle or a home as interest rates are still a concern.

The Federal Reserve’s target for 2% may take until next year to get to their key target number on the interest rate.

“There has been an expectation that [inflation] will go away quickly and painlessly; I don’t think it’s guaranteed that’s the base case,” said Powell in the fight for lower inflation. “It will take some time.”

Produced in association with Benzinga

Edited by Alberto Arellano and Kyana Jeanin Rubinfeld