Economic growth and higher inflation are increasing pressure on the Federal Reserve to raise interest rates, Decision Economics Inc.’s Allen Sinai said as policy makers open a two-day meeting.
“You have a stronger economy, you have a lower unemployment rate, you have inflation rising,” New York-based Sinai, who’s known five Fed chairmen in a 40-year Wall Street career, said in an interview on Bloomberg Radio’s “Surveillance” with Tom Keene and Michael McKee after the consumer price index rose more than forecast. “Guess what? That’s a problem for the Federal Reserve.”
Sinai said May’s CPI is “the big surprise” for the Fed meeting. Labor Department data showed a 2.1 percent jump from a year earlier, the most since October 2012, versus a 2 percent advance projected in a Bloomberg survey. The Fed’s preferred gauge of inflation, the personal consumption expenditures deflator, rose to an annualized 1.6 percent in April from 1.1 percent in March, data on May 30 showed. Unemployment was 6.3 percent in May, the lowest level since 2008.
“Inflation moving toward and up to their target of 2 percent this soon, if it stays, is going to change the context around which the Federal Reserve makes decisions, and give us not just the exit on the tapering, but give us that rate hike sooner rather than later,” said Sinai, a former chief global economist at Lehman Brothers Holdings Inc. He’s president and CEO of Decision Economics.
The central bank has slowed the pace of the bond purchases it uses to fuel growth to $45 billion a month this year, from $85 billion in 2013, while keeping the benchmark interest-rate target at zero to 0.25 percent since 2008.
The Fed will probably raise the rate faster than money-market investors expect, according to a majority of economists surveyed this month by Bloomberg News.