Consumer prices in December rose the most year-over-year since 1982, feeding into the Federal Reserve’s guidance that it may need to raise interest rates three times this year to combat inflation. But one economist says the last year has taught an important lesson: forecasters have to stay humble, and nimble. That means there’s no guarantee that three hikes will be necessary.
“I think there’s some downside risk for the economy, and, therefore, three hikes are not necessarily in the bag,” U.S. Bank Chief Economist Tendayi Kapfidze told Yahoo Finance Live in an interview. “The base case is that the economy is going to have another healthy year of growth. Probably we are going to get a number of Fed hikes, maybe some balance sheet tightening. But there’s a lot of risk and uncertainty to that outlook.”
Those risks include a “fiscal drag” as Americans adjust to an economy that still faces challenges from the pandemic but lacks federal stimulus checks, Kapfidze said. The Omicron variant could also weigh on January and February jobs numbers. Economists were surprised by weak job growth in December, with 199,000 jobs added compared with the 450,000 they had forecast.
“The Fed has reiterated many times that they are data-dependent. The way I think about it is — sure, if the data requires them to raise three times, they might do that. But if the data changes, then maybe they won’t,” Kapfidze said.
It was only in late November that Fed Chair Jay Powell moved up his timeline for winding down the central bank’s asset-purchase program to March, implying that interest rates could begin rising sooner than economists and investors had expected and opening the door to three hikes this year.
The consensus economist view still holds, for now, that the Fed will raise three — or even four — times in 2022. For some, that view was solidified by the 7.0% jump in headline inflation in December.
That’s even as Kapfidze is not alone among his peers in anticipating that the pace of inflation will start to moderate, particularly in the latter half of the year. He expects that process to be aided by a slowing in auto inflation as supply-chain bottlenecks ease. For new vehicles, prices rose 1% from November to December, and user car prices climbed by 3.5%.
Fed Chair Powell told the Senate Banking Committee this week, “If we see inflation persisting at high levels, longer than expected, if we have to raise interest rates more over time, then we will.”
Kapfidze’s caution for economists and strategists: “You really should approach these expectations with a lot of humility. A lot of things can change, and change very rapidly.”