Federal Reserve's Inflation Read Could Lead U.S. Into Recession, Warns Finance Expert

Federal Reserve’s Inflation Read Could Lead U.S. Into Recession, Warns Finance Expert

Finance expert Campbell Harvey warns of potential U.S. recession due to the Federal Reserve’s misjudged inflation perspective. Stock markets reflect rising economic concerns.

Campbell Harvey, famed for his recession prediction model, voices concerns over the Fed’s approach to inflation.

Inflation Gauge Under Scrutiny

In a recent conversation with MarketWatch, Campbell Harvey, a respected finance professor from Duke University, he expressed concerns about the Federal Reserve’s assessment of inflation. 

Harvey contends that the Fed’s perspective on inflation is misaligned, thus heightening the chances of the U.S. facing a recession.

“The [inflation gauge] that the Fed uses makes no sense whatsoever, disconnected from market conditions,” he shared.

A Questionable Emphasis on Shelter Costs

The Federal Reserve’s inflation measures focus on shelter costs, especially the surging prices of rental and owner-occupied homes. 

For instance, data from August revealed that shelter inflation climbed by 7.3% over the previous 12 months.

Shelter expenses constitute nearly 40% of the core Consumer Price Index (CPI) reading.

However, Harvey views this as problematic. 

He points out that while the retreat in shelter prices tends to echo the broader downward trend in headline inflation, it often does so with a delay. 

Harvey worries that the Fed might need to be accurately considering this delay, especially if it maintains high interest rates.

Supporting Harvey’s perspective, Jeff Bartash, an economics reporter with MarketWatch, indicated that the CPI does not account for many Americans who secured low mortgage rates before or during the pandemic and currently enjoy reduced housing costs.

“The Fed is … using inflation, in what I call, a false narrative,” expressed Harvey.

Rethinking Core Inflation

Should shelter inflation be adjusted to a growth of merely 1% to 1.5%, Harvey believes the overall core inflation would hover between 1.5% and 2%. 

This range aligns with, or even falls below, the Federal Reserve’s 2% objective. 

In August, consumer prices excluding shelter saw a year-over-year rise of 1.9%, a jump from July’s 1%.

Harvey cautions that the Fed is jeopardizing the U.S. economy by not clarifying the end of its rate hikes. 

He states, “Now, the higher those rates go, the worse [the recession] is.”

Yield-Curve Model Hints at Recession

Harvey is renowned for introducing the concept that an inverted yield curve can indicate an impending recession. 

This inversion happens when the yield on short-term three-month Treasury bills surpasses the long-term 10-year Treasury note rate. 

Historically, this unusual inversion has been a precursor to economic downturns.

Boasting an impeccable 8-out-of-8 track record spanning 70 years, Harvey’s yield-curve inversion model suggests that a U.S. recession remains a tangible possibility.

Stock Market Reflects Concerns

These economic concerns were mirrored in the stock market as well. 

On Thursday, major indices suffered significant losses, with the Dow Jones Industrial Average dropping by 1.1%, the S&P 500 declining by 1.6%, and the Nasdaq Composite slipping by 1.8%. 

This marked one of the most challenging days for stocks in recent times.

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