Nomi Prins: Fed to move from accelerating interest rate hikes in three phases

In an interview on CNBC, Author Nomi Prins stated that the ongoing interest rate hike meant to pacify markets seems to disconnect from many people’s economic realities. She says the Federal Reserve could consider three phases to move away from the growing interest rate increase.

Markets expecting Federal Reserve to hike interest rates

Surprising markets anticipate implementing a third sequential 75 basis point hike later in the month. This could be the fastest rate of monetary tightening ever since the start of the benchmark central bank funds rate’s use as a policy tool over three decades ago.

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Prins said:

This period of accelerating the rate hikes that we’ve seen so far has impacted the real economy because it has squeezed the borrowing costs … for real people, real consumers.

However, historically, money is cheap for the Street, with leverage remaining high. As a result, the Fed’s book is slightly shy of the $9 trillion mark, which is exceptionally high compared to what was witnessed during the pandemic and the 2008 financial downturn.

Although the market expects another 75 basis point rate hike, Prin explained that the Fed would likely discontinue the hawkish path in three phases because of the widening disconnect between the economy and investors. The Fed has already slowed the interest rate rise to 50 basis points with a neutral policy expected to commence reversing trajectory and be accommodative.

She added:

Whether that’s to cut rates or to increase the size of its book again, that still remains to be seen.

Central banks have taken aggressive measures to fight inflation

Inflation has skyrocketed in recent months, and central banks have enacted aggressive measures to prevent it from being entrenched in their economies. Factors that have driven inflation up include supply chain disruptions, the effects of the COVID-19 pandemic, and the conflict between Russia and Ukraine. In addition, there have been concerns that consumer price inflation has fed through wage inflation that central banks expect to exacerbate demand leading to a price increase.

Recently Fed Chairman Jerome Powel spoke about the growing concerns about the possibility of a recession due to tightening monetary policies. Speaking at the Jackson Hole economic symposium, Jerome asserted that some pain is necessary for the economy to fight rising inflation.

Prins: targeting wage inflation is a mistake

However, Prins disagreed with the move to target wage inflation when there is a decline in wage rise, terming it a mistake.

She explained:

I think the Fed absolutely is missing this connection between what is going on for real people in the real economy and why, and how that relates to the overall inflation picture, which it has basically positioned itself to fight. There’s just a mismatch here.

The outspoken economic reform advocate and global economist argued that the rate hikes from central banks to fight rising inflation had led to a disparity between the average consumer and entities and individuals that managed to leverage themselves when prices and borrowing costs were lower.