Editor’s Note: A typo in the headline of this article has been corrected.
The Federal Reserve, under Jerome Powell, kept interest rates within the 5.25-5.50% range for the seventh consecutive meeting on Wednesday, as widely anticipated by the market. This decision highlights the contrasting perspectives of prominent economic voices Mohamed El-Erian and Peter Schiff regarding future inflation and monetary policy.
What Happened: El-Erian, a noted economist, shared his thoughts on X, expressing that the softer-than-expected May inflation data, with a core measure reading of 3.4% and a headline rate of 3.3%, strengthens the case for a potential Fed rate cut in the near future.
El-Erian remarked, “While this data release strengthens what I already feel is a solid case for a #FederalReserve cut in June/July—and, if not, certainly in September—based on the overall economic outlook, I suspect that the Fed will view it as necessary but not sufficient. As such, the next few data releases take on even greater importance.”
El-Erian further analyzed the Federal Reserve’s Summary of Economic Projections, noting a hawkish tilt. He highlighted higher inflation forecasts for 2024 and 2025, a reduction in the expected number of rate cuts for 2024, and an increase in FOMC members expecting no cuts this year. Despite this, he pointed out the market’s relaxed response, suggesting that the SEP may not fully reflect the latest inflation data.
On the other hand, Peter Schiff, a vocal critic of Federal Reserve policies, sees inflation as a tax imposed by the government to finance its spending. He remains skeptical about the significance of the recent inflation data, citing the substantial increase in money supply since the 2008 financial crisis and the 2020 pandemic.
Schiff wrote, “Given all the money the #Fed created since the 2008 GFC, especially after the 2020 pandemic, the rise in deficit spending, and the fact that money supply is again on the rise, today’s lower-than-expected May #CPI means nothing. Much higher #inflation is already baked in the cake.”
See Also: Economist Warns ‘Crash Of A Lifetime’ Is Coming, Predicts S&P 500 To Plummet ‘86% From The Top’
Why It Matters: The decision to maintain interest rates comes in the wake of a hawkish surprise in the updated Summary of Economic Projections. The projections indicate fewer potential rate cuts ahead and slightly higher inflation estimates compared to the previous projections in March.
Despite the recent inflation data, economists like Paul Krugman have expressed optimism about the economy’s future. Krugman, a Nobel Prize-winning economist, reacted positively to the cooler-than-expected Consumer Price Index data, suggesting that inflation has essentially been defeated.
However, Powell tempered market excitement by stating that policymakers “want to gain further confidence” on inflation before considering interest rate cuts. He warned that upcoming inflation data may be “good but not [as] great” as the last one, given unfavorable base effects from the second half of 2023.
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Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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