Fed Downplaying Inflation? Economists Warn It Could ‘Accelerate Taper Process’

Treasury Secretary Yellen and Federal Reserve Chairman Jerome Powell Testify Before House Financial Services Committee, Washington, USA - 30 Sep 2021
SARAH SILBIGER / POOL / EPA-EFE / Shutterstock.com

Several economists are sounding the alarm, saying that inflation might be a bigger threat than what the Federal Reserve is anticipating, triggering difficult markets for the quarter ahead.

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Wharton finance professor Jeremy Siegel told CNBC “We’re headed for some trouble ahead. Inflation, in general, is going to be a much bigger problem than the Fed believes.” He went on to warn that there are serious risks tied to rising prices, and that “there’s going to be pressure on the Fed to accelerate its taper process,” he told CNBC. “I do not believe that the market is prepared for an accelerated taper.”

Siegel added that the biggest threat facing the markets is Fed chair Jerome Powell stepping away from easy money policies much sooner than expected due to surging inflation. “We all know that a lot of the levity of the equity market is related to the liquidity that the Fed has provided. If that’s going to be taken away faster, that also means that interest rate hikes are going to occur sooner,” he said. “Both those things are not positives for the equity market.”

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Inflation as measured by the Labor Department’s consumer-price index was 5.3% in the 12 months through August, close to the highest in 12 years, The Wall Street Journal reported.

George Lucaci, global head of distribution at asset management firm FolioBeyond, told GOBankingRates that over the years, the Board of Governors has become politicized. “The Bank of England is talking about raising rates, Norway raised rates. The Fed doesn’t want to connect inflation with interest rates, but it seems like every time he speaks, Powell seems increasingly hawkish, but wants to be careful given the unemployment and labor situation,” he said, adding that Yogi Berra’s quote “I really didn’t say everything I said” describes Powell perfectly as he necessarily transitions into a hawk.

Lucaci believes the Fed will shock the system much sooner than people think, probably by the end of 2022. “The Fed backstopped this whole economy and I don’t think they can continue to do that,” he continued.

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Other economists are sounding the alarm, as well, with some saying that the U.S. might be soon approaching a 1970s-style inflation situation, as GOBankingRates reported last week.

Stephen Roach, former Morgan Stanley Asia chairman, told CNBC he was worried that the impact of energy price spikes on China’s struggling supply chain will be the tipping point and warns of stagflation, a situation where economic growth falls yet inflation stays high. “It’s worrisome for the overall economic outlook and raises serious questions about the wisdom of central bank policies — especially that of the Federal Reserve,” he told CNBC.

Roach added that the likelihood of continued supply chain bottlenecks moving from one area to another is strikingly reminiscent of what we saw in the early 1970s, and suggests that inflation will stay at these elevated levels for longer than we thought.

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The worries echo those expressed by Fed Chair Jerome Powell. Speaking at the European Central Bank Forum on banking policy, he said that while he expects inflation to ease eventually, he sees the current pressures running into 2022, GOBankingRates reported. “It’s also frustrating to see the bottlenecks and supply chain problems not getting better — in fact at the margins apparently getting a little bit worse,” he added. “We see that continuing into next year probably, and holding up inflation longer than we had thought.”

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Last updated: October 4, 2021

About the Author

Yaël Bizouati-Kennedy is a former full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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