Rogoff Sees Fed Hiking Rates Up to 5% as Prices 'Out of Control'
Comment of the Day

May 03 2022

Commentary by Eoin Treacy

Rogoff Sees Fed Hiking Rates Up to 5% as Prices 'Out of Control'

This article from Bloomberg may be of interest to subscribers. Here is a section:

Fed Chair Jerome Powell and his colleagues are expected to raise interest rates by 50 basis points on Wednesday and signal they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the central bank’s 2% target. 

Rogoff spoke about the “risks of having a perfect storm” of recessions, where European economic growth contracts because of Russia’s war in Ukraine, China’s does the same due to “a failed Covid lockdown policy,” and the U.S. economy shrinks because the Fed “tightens too much, too fast.”  

“If China has a supply recession, which is really what we’re talking about, that’s going to feed inflation, it’s going to hurt demand in Europe,” Rogoff said. “I would say the risk has risen palpably, that this might happen,” he said of a U.S. economic contraction that would hit global financial markets. 

“Things could work out well, and so there’s a lot of uncertainty -- but it’s not hard to see all of these risks,” he said, adding that China “might already be bordering on recession.”

Eoin Treacy's view

Over the last month Treasuries sold off aggressively, the Dollar surged, major stock market indices pulled back sharply, and gold contracted. Conventional energy sources like natural gas and coal surged while crude oil has been steady. 

These trends have been pricing in both the potential for successive 50-basis point interest rate hikes and the supply disruptions arising from Russia using commodities as an economic weapon. Tomorrow’s Fed meeting will deliver news on the interest rate front but will do nothing to change the Ukraine question.

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