- The Fed could be making inflation even hotter with its promises of rate cuts.
- That's according to former Fed Governor Kevin Warsh, who says the central bank is "goosing" the economy.
- Some Wall Street forecasters see a resurgence of inflation before it heads back to the Fed's 2% target.
The Federal Reserve could be mucking up the economy with its promises that it will cut interest rates later this year, according to former central banker Kevin Warsh.
Speaking to CNBC on Monday, the former Federal Reserve governor pointed to expectations for the Fed to cut rates later in 2024, thanks to inflation cooling off from its multidecade high.
FOMC members have forecast 75 basis-points of rate cuts for the year, but that comes at a time when the stock market is booming and financial conditions may already be loosening, which spells trouble for consumers, Warsh said.
"The Treasury Department, the Federal Reserve … are goosing this economy," Warsh said. "A Fed promising to cut rates even as asset prices are melting up."
The premonition of coming rate cuts has the effect of loosening financial conditions, as investors have grown more bullish on stocks and plowed more cash into the market. The S&P 500 has already soared 27% from its October 2023 low, and 43% of investors stated they felt bullish on stocks over the next six months, according to last week's AAII Investor Sentiment Survey.
Looser financial conditions risk reigniting inflation. Such was the case in the 1970s, when central bankers dialed back interest rates prematurely and led the economy into a stagflationary crisis that caused consumer prices to soar even as the economy was stuck in low gear.
"I am sympathetic to their challenge in trying to navigate this economy as the world is on fire, but I think pre-committing as they do in these series of dots, each person saying how many times they cut … is deeply counterproductive," Warsh said of the Fed's rate cut forecasts indicated in the "dot plot." "They're taking a big risk with inflation."
Some Wall Street forecasters see a resurgence of inflation before it heads back to the Fed's 2% target. Consumer prices unexpectedly accelerated in February, with the consumer price index increasing 3.2% year-over-year.
Markets are waiting for the February personal consumption expenditures price index, the Fed's preferred measure of inflation, to roll out at the end of the week. A higher-than-expected reading could reset the market's expectations for cuts this year. For now, investors are still pricing in a 71% chance the Fed slashes interest rates by 75 basis points or more by December, according to the CME FedWatch tool.