Joseph Stiglitz thinks a further Fed rate hike could make inflation worse

Federal Reserve officials spent last week shown Interest rate hikes will continue to dampen rising prices – but this risks increasing inflationary pressures, according to a Nobel Prize-winning economist.

“The real worry on my mind is, are they going to raise rates too high, too quickly, too far?” Joseph Stiglitz told CNBC’s Steve Sedgwick Friday at the Ambrosetti Forum in Italy.

The Columbia University professor, author of “The Price of Inequality” and “Globalization and Its Discontents,” said that although an adjustment from zero or near interest rates is needed, zero has been common since 2008, but there are three reasons a positive Fed course can cause inflation.

The first is that the source of inflation, according to Stiglitz’s analysis, is a supply-side disruption that leads to higher prices of oil and food, even causing lack of formula milk.

“Will raising interest rates lead to more oil, lower oil prices, more food, lower food prices? The obvious answer is no. In fact, the real risk is that it will make the situation worse. more,” he told CNBC at the economic conference held. on the shores of Lake Como.

“Why? Because what we need to do is invest to relieve some of the supply-side bottlenecks that are wreaking havoc on our economy. That’s going to make it harder.”

The second reason, Stiglitz says, is evidenced by the fact that the profit margins of large corporations are increasing along with their input costs.

“They’re not just transferring costs, they’re passing it on even more. There’s a well-defined theory that shows that when interest rates rise, companies … take more advantage of today’s price increases. .”

“So raising interest rates in uncompetitive markets could lead to more inflation,” he said.

Finally, he continued, there is the potential for cost increases in a key component of inflation: housing.

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“You raise interest rates, it’s reflected in rents, and there’s a Federal Reserve study that shows that,” he said.

The Federal Reserve raised its benchmark rate by 0.75 percentage points in both June and July.

In a speech on August 26, Fed Chairman Jerome Powell speak that while higher rates, slower growth and softer labor market conditions should ease inflation, it also means “some pain” for households and businesses.

Stiglitz is more concerned about the impact of the US economy on people.

One is that interest rates will continue to rise faster than home prices fall – “house prices will stay high, they won’t fall as quickly as interest rates rise and that will increase the generational divide in our society.” me,” he said.

Another is recent US jobs market data, on Friday shows Nonfarm payrolls increased by 315,000 in August though economic growth slows downdoesn’t indicate strength as much as some have suggested.

“One indicator they don’t really capture is what’s going on with real wages, which often rise when the labor market tightens,” he said.

Real wages are wages adjusted for inflation.

“The labor market is tight, the prices of goods are going up, which means you have to pay workers more, but that doesn’t happen,” Stiglitz notes.

“Real wages are falling, so that should at least make you nervous,” he added.

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