Tech entrepreneur Elon Musk weighed in on the inflation debate as Federal Reserve policymakers prepared to convene for a two-day meeting at which markets expect the central bank to deliver another large rate hike to cool soaring prices.
Wood added in a follow-on message that the current bout of inflation started with the pandemic and supply-chain dislocations, and was made worse by Russia’s invasion of Ukraine.
“The Fed is solving supply-chain issues by crushing demand and, in my view, unleashing deflation, setting it up for a major pivot,” she argued, prompting Musk to respond with his concurrence.
Inflation or Deflation?Summers told Bloomberg’s “Wall Street Week” in a recent interview that the Fed acted too slowly on soaring inflation and that the central bank now needs to keep hiking aggressively to tamp down price pressures.
“History records many, many instances when policy adjustments to inflation were excessively delayed and there were very substantial costs,” Summers said, noting that the most significant example of such costs was during the long period of high inflation during the 1970s.
Summers added that he saw evidence that inflation had become entrenched. He pointed to core inflation rising more than 6 percent in August, as well as sharp wage boosts for job-switchers and rising input costs in the housing sector.
The former Treasury Secretary also said he wouldn’t be surprised if the Fed hiked rates to above 5 percent to get inflation down.
But Wood argued that deflation—not more inflation—is fast approaching, as more economic data emerge indicating a slowdown.
‘Some Pain’ Price of Bringing Down InflationThe Fed likely will raise its benchmark interest rate by 75 basis points on Sept. 21 for a third consecutive meeting, according to fed funds futures contracts, which give 80 percent odds for such a hike and a 20 percent chance for a bigger 100 basis-point boost.
“Reducing inflation is likely to require a sustained period of below-trend growth. Moreover, there will very likely be some softening of labor market conditions,” Powell said in a speech on Aug. 26.
“These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” the central bank chief added.