Robert Shiller: The Fed risks “disgrace” if it does not control inflation

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Central banks face the unenviable task of trying to contain high inflation for decades without triggering hard recessions that could trigger misery in the world. But Robert Shiller, a Nobel Prize-winning economist at Yale University, thinks they have no choice but to hold on.

“If we see prolonged inflation now, it will be a disgrace to this country and it will further reduce trust in institutions,” Shiller told Before the Bell in an exclusive interview.

Shiller helped develop the main measure of House prices in the United States and popularized a key stock valuation method. His most recent book, however, examines how the stories we tell ourselves as a society can shape our economic future.

This is a big reason why inflation is considered such a threat. If people think that prices will continue to rise at a rapid rate, they will start demanding higher wages. This will push companies to raise prices even further to protect their margins, fueling a cycle that may become increasingly difficult to control.

Since the latest report showed that annual US consumer inflation is stubbornly high at 8.3%, bets have increased on Wall Street that the Federal Reserve could raise interest rates by a percentage point for the first time in its modern history. Shiller thinks a hike of this magnitude might be necessary given the scale of the problem facing the Fed.

An excerpt from our conversation is below. It has been slightly edited and condensed for clarity.

Home prices in the United States are rising at a slower pace, but they continue to rise strongly. Do you think it’s fair to say the market is cooling?

I think so. It’s hard to predict these things, but it’s been a remarkable run we’ve seen in house prices since the 2012 low – over 10 years. It can’t last forever.

He was driven by expectations, self-fulfilling prophecies. People think they are increasing, so they expect to have to take the higher amount. This continued, even during the Covid-19 epidemic.

Are we witnessing the beginning of a healthy correction, or could it be more severe?

There could be a price drop, certainly. I expect there to be at least a modest decline in inflation-adjusted real house prices. But it’s not something that has to happen quickly.

Should the Federal Reserve be worried about the housing market?

I think the inflation rate is a matter of confidence. We don’t index everything to inflation because we think we have a monetary authority that will prevent it from getting out of hand. If we see prolonged inflation now, it will be a disgrace to this country and it will further reduce trust in institutions. It’s bad for the economy. It’s bad for all of us, a loss of confidence.

Are you worried that we are entering a prolonged period of higher inflation?

To get people’s attention, to change their inflation expectations, you would have to raise interest rates to a high level, to get a sudden correction. So I don’t think inflation will drop to 2% in a year. It’s not a good idea to be so aggressive.

The next meeting of the Federal Reserve, the last time I had an idea of ​​the consensus, it could be increased by one percentage point. That’s pretty big by historical standards, but it’s not the super drastic changes that would bring inflation down to 2% right away.

So you think the Fed might need to go even further to alter expectations at this point?

I think a percentage point is a good number because people don’t expect the Fed to go beyond that. And if they go beyond that, it would dampen the will to spend more than we thought possible.

I would stay within the framework they have established of responding gradually. One percent seems about right. I have no science to say this, but it looks like the public will take this action as confirmation of their belief that the Fed is taking action against inflation, but it’s not so dramatic that it will disrupt the balance in our economy.

The slate of blockbuster sports car maker Porsche is growing with big ambitions, even as markets jitter amid recession fears and concern over steep interest rate hikes by central banks .

The latest: Volkswagen

said on Sunday that it was targeting a valuation of its Porsche division of up to 75 billion euros ($75.1 billion). This makes the IPO the second largest ever in Germany.

Shares of Volkswagen rose slightly on Monday morning before falling back.

What happens next: Trading is expected to begin on the Frankfurt Stock Exchange on September 29. Until then, Volkswagen bankers will be racing to see how much demand they can generate. The preferred shares offered were offered at a price between 76.50 euros and 82.50 euros.

The IPO is expected to generate interest due to the strength of the Porsche brand. In the first six months of the year, the company recorded nearly 18 billion euros ($18 billion) in revenue and 3.5 billion euros ($3.5 billion) in Operating profit.

But some would-be investors may choose to stay away as they reconsider their strategies during a tumultuous time. Market conditions have been hampered by sky-high energy prices in Europe, as well as a sharp rise in borrowing costs as the Federal Reserve and European Central Bank attempt to contain inflation.

The European Stoxx 600 index has lost almost 17% since the start of the year, while the German DAX is down 20%. Volkswagen’s stock has fallen nearly 19% in 2022.

More Americans are saddled with credit card debt for longer periods of time as emergency spending and rising costs of living make it harder for them to pay off their balances, according to a new report. investigation.

Breakdown: A survey of people with credit card debt released Sunday by found that 60% of respondents who go into debt month-to-month have owed money to their creditors for at least a year. This is an increase of 10 percentage points over last year.

“The percentage of people who have been in credit card debt for at least a year has increased dramatically,” said Ted Rossman, senior industry analyst for

About half of credit card holders who have monthly debt said they had to borrow to meet an unforeseen event like medical bills or car repairs. But 31% of Millennials said daily expenses were the main reason for their credit card debt.

This cohort could come under increasing pressure as the cost of living remains high and interest rates continue to climb. The survey found that rising costs would have a major impact on 41% of total credit card holders and more than half of those with outstanding debt.

Why it matters: Banks are watching closely whether the people and businesses they have lent money to will be increasingly unable to repay them. So far, they’re not too worried. It also helps that US credit card balances are down 4% from the end of 2019. But that’s a vulnerability as economic growth slows and inflation persists.

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publishes its results before the opening of the American markets. The NAHB Housing Market Index for September releases at 10 a.m. ET.

Coming tomorrow: Share trading in London will resume after the state funeral of Queen Elizabeth II.

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