“Making Money” panelists Chris Roe and Stephen Blitz explain the Federal Reserve’s moves to rein in inflation.
Some Wall Street strategists us economy Amid recent signs that inflation is stalling, we could be heading towards a 1970s-like stagflation scenario.
Consumer price indexes released in December and January were higher than expected, raising concerns that overcoming high inflation may be more difficult than previously thought.
“We believe there is a risk that the story will revert from Goldilocks to the stagflation of the 1970s, with significant implications for asset allocation,” Marko Kolanovic, chief market strategist at JPMorgan, wrote in a note to clients in late February. “There is,” he said.
The number of well-paying jobs is decreasing
Stagflation is a combination of economic stagnation and high inflation, characterized by soaring consumer prices and high unemployment.
This phenomenon devastated the U.S. economy in the 1970s and early 1980s, with soaring oil prices, rising unemployment, and easy monetary policy driving the consumer price index up to 14.8% in 1980. federal reserve Policymakers decided to raise interest rates to nearly 20% that year.
“There are a lot of similarities with today’s era,” Kolanovic said. “We’ve already had a first wave of inflation, but questions are starting to arise as to whether we can avoid a second wave if policies and geopolitical developments remain the same.”
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Concerns about stagflation grew in 2022 as the Federal Reserve began aggressive interest rate hikes to curb rampant inflation, but there are signs that price pressures are subsiding without significantly hurting economic growth. Last year, most of those concerns receded.
However, there have been some recent signs that inflation may prove to be more robust than expected. Inflation has fallen significantly from its peak of 9.1%, but progress since the summer has been roughly flat.
“The threat of a resurgence of inflation is the main reason investors should be concerned about the possibility of stagflation,” said Michael Alone, chief investment strategist at State Street. “Extraordinary government spending, structural demand-supply imbalances in labor and housing markets, and deglobalization are all contributing to inflationary pressures.”
Some Wall Street strategists are growing concerned that the U.S. economy could be heading toward a 1970s-style stagflation scenario. (Photographer: John Taggart/Bloomberg via Getty Images/Getty Images)
Several Fed policymakers have said the path to 2% inflation is “tough” while discussing the outlook for interest rates. Officials kept the option of cutting interest rates by the end of the year on the table, but stressed there was no urgency given the economy’s surprising strength and the risk of a resurgence in inflation.
Investors had previously bet on a series of aggressive rate cuts this year, but tempered their expectations after a hotter-than-expected inflation report and a cautious message from Fed officials.
Arone warned that the Fed could be forced to take a high stance on monetary policy for an extended period of time, which could ultimately weigh on growth.
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“The Fed’s reluctance to cut interest rates until it is certain that inflation approaches 2% suggests that monetary policy will remain restrictive and could stifle economic growth,” Arone said. “I am doing so,” he said. “The labor market is showing resilience, but the combination of a slowing economy and rising unemployment could increase the risk of stagflation.”
Rising interest rates tend to raise interest rates on consumer and business loans, forcing employers to cut spending and slowing the economy. Rising interest rates have pushed the average interest rate on a 30-year mortgage above 7% for the first time in years. Borrowing costs for everything from home equity lines of credit to auto loans and credit cards have also skyrocketed.
