American consumers may have to face a recession if they want inflation to finally go away.
At least that’s what JPMorgan President and COO Daniel Pinto said Monday.
“I think putting inflation back in a box is very important,” Pinto he told CNBC, arguing that the Federal Reserve should continue to raise interest rates even as the economy slows. “If it causes a slightly deeper recession over a period of time, that’s the price we have to pay.”
Fed officials have raised interest rates five times this year in a bid to combat inflation, but so far, their efforts have not been as fruitful as economists would have liked.
The most common measure of US inflation, the Consumer Price Index (CPI), increased 8.2% from a year earlier in September. While that’s nearly a percentage point below June’s 40-year high of 9.1%, it’s still well above the Fed’s 2% target rate.
And core inflation, which excludes the most volatile food and energy prices, hit its own new maximum of 40 years last month, lending weight to the argument that inflation is becoming “entrenched” in the economy.
Pinto’s comments are on the aggressive side, and he joins others including former Treasury Secretary Larry Summers and Queens’ College, Cambridge President Mohamed El-Erian.
But not all leading economists and business leaders believe that inflation is here to stay, or that the Fed should keep raising rates. From billionaire investor Barry Sternlicht to Howard University economics professor William Spriggs, there is a growing chorus of critics who argue that inflation is already coming down and that the Fed should stop its rate hikes before triggering a major recession. .
On Monday, JPMorgan Chairman and COO Daniel Pinto rebuked this new group of dovish Fed watchers, citing his experience as a child in Argentina as evidence that fighting inflation must be a top priority. for the Fed.
Argentina has historically dealt with some of the worst inflation in the world. In September, for example, consumer prices skyrocketed 83% year over year in the country. And between 1944 and 2015, Argentina average annual inflation it was 204%.
Pinto recalled memories of his childhood in the South American nation, where he said the value of the Argentine peso changed so quickly due to inflation that workers could lose up to 20% of the value of their paychecks in a single day if they didn’t. . they rush to change their money into US dollars.
Pinto said that when he was a child, supermarkets were forced to hire “armies of people” to re-price products every hour due to inflation.
“At the end of the day, they had to remove all the tags and start over the next day,” he said.
Pinto’s experience with the devastating effects of runaway inflation has led him to believe that central banks need to be aggressive when fighting rising consumer prices, because if they don’t, inflation can take root in the economy as it does. did in Argentina, or to a lesser extent. measured in the US in the 1970s and 1980s.
“That’s why when people say, ‘The Federal Reserve is too aggressive,’ I don’t agree,” Pinto said.
He went on to argue that the Fed should raise interest rates to a maximum of 5%, nearly 2 percentage points above current levels. He said that if they do this, it will increase unemployment and ultimately bring inflation under control.
Pinto is also more confident in the ability of the US economy to weather the pain of a recession than in the past. He said American households and businesses still have strong balance sheets, there is less leverage in the banking system and mortgage standards are much higher than they were in 2008.
“Things that triggered problems in the past are now in a much better position,” Pinto said. “That said, you hope nothing new comes up.”
However, Pinto acknowledged that the potential “Great Black Swan,” a term used to describe an unpredictable event with devastating economic consequences, is the spread of geopolitical tensions from Ukraine and Taiwan to the rest of the world.
Finally, he added that he expects the US stock market to continue falling as rate hikes weigh on corporate profits.
“I don’t think we’ve seen the bottom of the market yet,” he said. “When you think about corporate earnings for next year, expectations may still be too high; multiples in some stock markets, including the S&P, are probably a bit high.”
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