Federal Reserve Bank of Chicago President Charles Evans said this week that he would welcome 2.5% inflation in the U.S. in order to average out the period we’re in now in which price pressures are running below the Fed’s 2% inflation target.
“I think we have to cross over, beyond 2%, with some momentum,” said Evans. “I would be quite pleased if we could get core inflation up to 2.5% for a time.”
But according to Evans, it could take years before the inflation rate—which the central bank clocked at 1.4% in August—would rise back to the target, setting up a conflict over when and how fast to bring interest rates back up once the target is finally hit.
“I expect inflation to slowly improve, reaching 2% on a persistent basis in 2023 and then moderately overshooting 2% over the following few years,” Evans said at the National Association for Business Economics conference. “We likely have a lot of work ahead of us. And it’s crucial that we acknowledge the magnitude of the job up front to help lessen the temptation to back off the overshoot too early in the process.”
Bleakley Advisory Group chief investment officer Peter Boockvar, however, is less worried about slowly getting back up to the Fed’s 2% inflation target, than he is about the U.S. falling into stagflation where high inflation meets slower economic growth.
“A stagflationary-type environment, if it were to happen, is the market’s worst nightmare,” Boockvar said. “Higher inflation becomes particularly dangerous because it’s going to come with still very mediocre economic growth.”
Such a scenario, according to Boockvar, would have far-reaching consequences.
“[It] could handcuff the ability of the Fed to do more easing, lead to higher interest rates which would crimp a very credit-dependent economy and can also hurt… those high-flying P/E stocks,” Boockvar continued.
Boockvar stressed that higher long-term yields, which are not anchored by the Fed like short-term yields are, is sure to make expensive large cap growth plays less attractive to investors.
“One of the rationale for the higher multiples, particularly in the technology sector, was very low interest rates,” Boockvar added.
Boockvar began to worry about inflation rising higher back in June and July when the economy was beginning to open up again amid the coronavirus pandemic. His warning is growing louder now as 10-year and 30-year Treasury Note yields rise to four-month highs, with the 10-year Note up nearly 53% over the last two months and the 30-year up more than 33% in the same timeframe.