The late Paul Volcker was dubbed the “dragon slayer” for conquering inflation as the Federal Reserve’s chair in the 1980s. The central bank’s current chief, Jerome Powell, is yet to defeat his mythical beast — and Wall Street is getting worried.
Powell warned on Wednesday that the Fed’s fight against inflation isn’t over after annualized price growth accelerated to 3.2% in February.
It’s not yet clear if the recent string of elevated inflation readings is “more than just a bump” on the path toward the Fed’s 2% target, Powell said. The bank is unlikely to lower interest rates until its target comes closer into view, he added.
Powell’s words, and the news that a key manufacturing index expanded last month for the first time since 2022, have reignited inflation fears and tempered hopes that borrowing costs will fall anytime soon.
Raising the alarm
Bank of America analysts have suggested that stubborn inflation could mean the Fed doesn’t start cutting rates until March next year.
Greenlight Capital’s David Einhorn also told CNBC on Wednesday there might be no rate cuts this year, and said the pace of price increases appears to be picking up.
“I think inflation is reaccelerating, I think there’s a lot of indication of that,” the hedge fund manager said.
Einhorn disclosed that Greenlight holds shares of the SPDR Gold Trust and owns physical gold bars, making the popular hedge against inflation and market crashes a “very large position” for the firm.
“Rich Dad Poor Dad” author Robert Kiyosaki issued a similar warning in an X post on Wednesday.
The personal-finance guru said Powell had “finally admitted inflation is winning,” and advised people to buy gold, silver, and bitcoin as he expects rising prices to erode the dollar’s purchasing power.
Gary Shilling, a Wall Street veteran known for nailing several market calls over the past four decades, underlined the inflation threat to “The Julia La Roche Show” in an interview released this week.
“It’s a tougher slog than many people thought,” he said, noting that services inflation tends to be sticky. “We’ve got a ways to go there.”
Merrill Lynch’s first chief economist also explained the risk to the Fed of moving too fast.
“The last thing they want to do is cut interest rates prematurely, have inflation surge, and then they’ve got to go back and really kill the economy to reestablish credibility,” Shilling said.
The dragon rears its head again
It’s worth remembering how we got here. Inflation spiked to over 9% in the summer of 2022, spurring the Fed to hike its benchmark rate from nearly zero to north of 5% in under 18 months.
The combination of surging prices and sharply higher borrowing costs has squeezed households, businesses, and entire sectors like regional banks and commercial real estate.
It’s also stoked concerns of a market crash and a recession — even though stocks have surged to record highs and consumer growth, economic growth, and employment have proven resilient.
It’s no wonder, then, that investors are waiting impatiently for the Fed to cut rates. Doing so would signal the inflation threat is over, reduce the risk of a recession by stimulating the economy, and potentially boost risk assets like stocks and crypto by lowering the returns offered by safer options like Treasurys and savings accounts.
Inflation might appear to be back on the menu, but not everyone is worried. Fundstrat’s famously bullish boss, Tom Lee, proclaimed this week that it’s dropping “like a rock” and the first rate cut is still likely to be in June.
