FX: Risaz: Cut interest rates now to reduce inflation

Barry Ritholtz, chief investment officer at Ritholtz Wealth Management, said:If the Federal Reserve wants to bring inflation back to its long-term goal of 2%, it needs to cut interest rates, not raise them.

This view runs counter to the thinking of many economists and the Federal Reserve, which is widely expected to raise interest rates again at the FOMC meeting later this month.

Risards believes that while a rate hike may be the right way to reduce inflation from its June 2022 peak of 9% to its current 3%, the current drivers behind inflation will not respond well to further rate hikes.

This is because the current drivers of inflation include soaring apartment rents, housing shortages, and labor shortagesThese factors could have a big impact, as housing costs alone account for about a third of consumer inflation

Risaz wrote last week, "Raising interest rates will not solve these problems, and could make them worse.Further rate hikes by the FOMC would not only make landlords' equivalent rents (the'hypothetical 'cost of renting for homeowners) look worse, it would also reduce the supply of single-family homes, making homes more expensive, and it would also push up apartment rents by bringing more people into the rental market. "

Over the past 15 months, the Federal Reserve has raised rates sharply, taking the federal funds rate from nearly 0% in early 2022 to just over 5% today. While the Fed paused its rate hikes at its June meeting, markets expect the Fed to raise rates at least once more, even if there is continued evidence that inflation is easing.

Considering that before the pandemic, the Federal Reserve had kept interest rates near zero for a full decade, but inflation had been kept below 2%,FXTForex investors don't think Risaz's views are crazy。

"Interest rates, no matter how they are raised by another 50 basis points, will not lead to more inflation [cooling].The problem with houses is that there aren't enough houses... you want more houses on the market... and giving people lower mortgage rates basically accomplishes that.", Risaz said Wednesday.

Risards' objection to the Fed goes beyond cutting interest rates rather than raising them to reduce inflation. He also believes that,Due to the trillions of dollars of fiscal stimulus injected into the economy over the past three years, the Federal Reserve should also raise its long-term inflation target from 2% to around 2.5% or 3%.

"2 per cent is a reasonable upside [inflation] target when the financial crisis has sent the economy into a slump and zero interest rate policy and/or quantitative easing has pushed interest rates close to zero. But after $5- $6 trillion of fiscal stimulus and 7.5 per cent mortgage rates,Perhaps a 2.5% or even 3% inflation target makes more sense", Risaz wrote.