Rate hikes – globally the most popular antidote to fight inflation is “unlikely” to help lower prices this year, says Paul Gambles. He’s the Managing Partner at MBMG Group.
Gambles’ remarks on CNBC’s ‘Street Signs Asia’
On CNBC’s “Street Signs Asia”, Gambles reiterated that the central bank and its monetary policy tends not to have a whole lot of influence on the supply-driven inflation that we’re facing right now.
Supply is very difficult to manage. Fed’s the first one to say monetary policy can’t do anything about supply shock. And then they go and raise interest rates. Adjusting monetary policy is the wrong solution to the problem.
U.S. Federal Reserve resorted to a 75 basis points increase in interest rates last month that pushed the benchmark S&P 500 index into the bear market territory.
Demand remains below the pre-COVID level
Gambles also dubs rate hikes a “wrong solution” to the ongoing surge in prices because demand continues to dwell below the pre-pandemic level. He added:
If we hadn’t had COVID, we’re still 10 million jobs short of where we would be. Budget for 2022 is $3.0 trillion; lighter than 2021. So, we’ve got a huge shortfall going in U.S. economy and there’s little that monetary policy can do about that.
A hawkish Fed, therefore, risks pushing the economy into a recession more than it helps to tame inflation. CPI for June is expected next week, after hitting a new forty-year high of 8.60% in the prior month.
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