As investors consider the Federal Reserve’s next move, analysts, economists and market participants are also closely monitoring inflation levels. and many experts predict a further decline. However, Cambridge University economist Mohamed El-Erian believes that inflation will be “sticky” at around 4% mid-year. Meanwhile, the central bank’s main focus is to bring inflation down to 2%.
5% is the new 2%. Tight monetary policy and unchecked interest rate hikes
Members of the Federal Reserve, including its 16th chairman, Jerome Powell, have frequently stated that the Fed’s goal is to bring inflation down to 2%. Powell has emphasized that the Federal Open Market Committee’s (FOMC) “current overarching focus is to bring inflation back to the 2% target.” To tame inflation, the central bank has used tight monetary policy and interest rate hikes. So far, the Fed has raised interest rates seven consecutive times since last year, with rate hikes occurring on a monthly basis.
U.S. inflation has been falling since approaching double digits in October and November 2022. At the time, economist and gold enthusiast Peter Schiff said, “The era of sub-2% inflation in the US is over.” At the 2023 World Economic Forum event in Davos last week, JLL CEO Christian Ulbrichtold the Financial Timesthat his peers are starting to say that 5% is the new 2%. Inflation will remain around 5% for a sustained period,” Ulbrich told reporters at the FT. Mohamed El-Erian, president of Queen’s College, Cambridge University, explained on January 17 that inflation could become “sticky” in the 4% range.
El-Erianwrote in an op-ed published in Bloombergthat “stocks and bonds have had an upbeat start to 2023, but there is still much uncertainty about global growth, inflation, and policy prospects. The economist added, “The improved U.S. growth outlook is accompanied by a depletion of savings that benefited from large fiscal transfers to households during the pandemic, as well as rising debt.”
El-Erian: “Wage pressures will increase, leading to a marked change in inflation rates.”
El-Erian further noted that the value of bitcoin (BTC) (32) (33) has risen markedly this year, citing investors’ acceptance of the easing of financial constraints and their increased willingness to take risks as the reason for the increase. This economist writes, “Bitcoin is up about 25% so far this year as financial conditions have eased and risk appetite has increased.”
The Federal Reserve is aiming to bring inflation back to the 2% range, althoughsomeexpect inflation to fall to 2.7% this year and 2.3% in 2024.