Joseph Stiglitz thinks further Fed rate hikes could make inflation worse

Federal Reserve officials have spent the past week indicating that rate hikes will continue in order to bring prices down – but that risks intensifying inflationary pressures, according to a Nobel Prize-winning economist.

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

The Columbia University professor, author of ‘The Price of Inequality’ and ‘Globalization and Its Discontents’, said that if there needs to be an adjustment from the zero or near zero interest rate policy that prevailed since 2008, there were three reasons why an aggressive course from the Fed could fuel inflation.

The first is that the primary source of inflation, according to Stiglitz’s analysis, is supply-side disruptions that lead to higher oil and food prices, even causing a shortage of infant formula.

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

“Why? Because what we need to do is invest in relieving some of these supply-side bottlenecks that are causing so much havoc in our economy. That’s going to make it harder.”

The second reason, Stiglitz said, is evidenced by the fact that large companies’ margins have risen along with their input costs.

“They not only passed on the cost, they pass it on even more. There is a well-defined theory that points to the fact that when interest rates rise, companies…benefit more from higher prices today.”

“So rising interest rates in uncompetitive markets can lead to even more inflation,” he said.

Finally, he continued, there is potential for higher costs in an important component of inflation: housing.

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

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

In a speech Aug. 26, Fed Chairman Jerome Powell said that if higher rates, slower growth, and looser labor market conditions would lower inflation, that would also mean ” some pain” for households and businesses.

Stiglitz was more concerned about the impact of the American economy on citizens.

The first was that interest rates will continue to rise faster than house prices will fall – “prices stay high, they’re not going to come down as fast as interest rates go up and that’s going to increase the intergenerational divide in our society,” he said.

Another was that recent U.S. labor market data, which showed nonfarm payrolls on Friday rose by 315,000 in August despite slowing economic growth, does not indicate as much strength as some have suggested.

“One indicator they don’t really grasp is what’s happening with real wages, which normally rise when labor markets are tight,” he said.

Real wages refer to wages adjusted for inflation.

“Labour markets are very tight, prices of goods are going up, that should mean you’re compensating workers even more, but that’s not happening,” Stiglitz noted.

“Real wages are falling, so that should at least be a concern,” he added.

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