After the news that consumer prices soared 8.3% in the 12 months through August, a clear consensus emerged among economists and investors regarding the Federal Reserve.
This consensus is that the Fed will raise interest rates by 75 basis points at its next meeting, Sept. 20-21. Harvard economist Larry Summers is part of the consensus.
“Today’s [Sept. 13] CPI report confirms that the U.S. has a serious inflation problem,” the former Treasury secretary wrote on Twitter.
“Core inflation is higher this month than for the quarter, higher this quarter than last quarter, higher this half of the year than the previous one, and higher last year than the previous one.”
Core prices, which exclude food and energy, rose 0.6% in August from July and climbed 6.3% in the 12 months through August.
“It is highly implausible that inflation will fall to 2 percent without unemployment exceeding 4.5 percent,” Summers tweeted. “Yet this is the most pessimistic view among 19 members of the [Fed’s policy-making Federal Open Market Committee] FOMC. Dangerous group think.”
Unemployment registered 3.7% in August. So it must rise quite a bit before the Fed can reach its 2% inflation target, according to Summers’ reasoning.
‘Self-Evident’ Move
So what does all this mean for the Fed’s meeting later this month?
“It has seemed self-evident to me for some time now that a 75 basis points move in September is appropriate,” Summers tweeted.
“And, if I had to choose between 100 basis points in September and 50 basis points, I would choose a 100 basis points move to reinforce credibility.”
The Fed’s target range for the federal funds rate on overnight bank loans is now 2.25%-2.50%.
“I don’t think there is any substantial probability in the U.S. that this episode [of inflation] can be managed without rates being raised to close to 4 percent,” Summers tweeted.
“In that context, it seems to me to be better to move rapidly than slowly.” So Summers might want to see the Fed raise rates by 75 basis points again at its November meeting.
Goldman, Wood Views
Goldman Sachs economists predict that after tightening by 75 basis points this month, the Fed will go 50 basis points in November and 25 basis points in December.
“Fed officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation has not been as uniform or as rapid as they would like,” the economists wrote in a commentary.
At the polar opposite to Summers, famed investor Cathie Wood, chief executive of Ark Investment Management, still believes we’re suffering deflation and are in the midst of a recession.
She considers consumer-price gauges a lagging indicator. Gold is the best leading indicator for inflation, she said. And it has traded in a range of $1,700 to $2,075 over the past two years, peaking in August 2020.
Meanwhile, weakness in home and auto sales point to recession, she said.
