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As inflation continues to rise, Morgan Stanley CEO James Gorman advised the Federal Reserve to hike interest rates.
The Bureau of Labor Statistics announced last week that inflation rose at a 6.8% pace last month — the largest year-over-year increase since June 1982. Households are grappling with significantly higher price levels in staples such as gasoline, food, vehicles, electricity, and apparel.
As the Federal Reserve begins deliberations on potentially tapering monetary stimulus, Gorman believes that a rate hike would be prudent.
“We are heading toward a rising interest rate environment,” Gorman said during an interview with CNBC. “I felt the Federal Reserve would be better off storing away some of the rate increases, so when the inevitable downturn comes, you’ve got some ammunition to fight with.”
In order to establish a normal interest rate regime, Gorman said that the central bank will need to carry out 10 rate hikes. “If I were the Fed, I would start moving earlier rather than later. Store away some ammunition and accept the reality,” he continued.
“I don’t think it derails the economy,” Gorman added. “This is what you need, you need balance in the economy.”
Aligning with Gorman’s comments, the Organization for Economic Cooperation and Development recently noted that the global recovery from COVID-19 and the lockdown-induced recession is “losing momentum” due to high price levels.
“Alongside cost pressures from manufacturing supply bottlenecks and food price increases, imbalances in the energy market are a key factor driving up inflation in all economies,” said the group. “Gas prices have risen sharply, notably in Europe, and risks are high, with storage levels around 28% lower than they would normally be at this time of the year. Rising food and energy costs are inevitably hitting low-income households the hardest.”
“Inflationary pressures are proving stronger and more persistent than expected a few months ago. Consumer price inflation in the OECD is now projected to start fading in 2022, before moderating as key bottlenecks ease, capacity expands, more people return to the labour force and demand rebalances. The Outlook underlines the risk that continued supply disruptions, perhaps associated with further waves of COVID-19 infections, may result in longer and higher inflationary pressure.”
On Monday, Lawrence Summers — who worked as Treasury Secretary under the Clinton administration and National Economic Council director under the Obama administration — likewise called it a “long shot” to believe that inflation will soon return to “levels anywhere near” the Federal Reserve’s targets.
“Given housing prices and tightening labor markets, there is no compelling reason to expect major deceleration in inflation,” he said. “But, even if inflation subsided to .2 percent a month, the annualized inflation rate would be 6.5% in March 5.1% in June and 4.0% before the election in September.”
“My guess is barring a major recessionary or financial shock next fall, headline inflation will round to 5 percent,” Summers continued. “We are beyond where the Vietnam inflation took us but still have plenty of time to stop a late 1970s situation from developing, if we have the will.”