Former First Deputy Managing Director at the International Monetary Fund Geoffrey Okamoto argued that inflation has been “persistently misjudged” by policymakers.
Okamoto agreed with economist Mohamed El-Erian, chief economic advisor at Allianz, who said on Sunday that most of the current record-high inflation could have been avoided had the Federal Reserve acted earlier.
Okamoto, who served as the US Department of the Treasury’s acting assistant secretary for international finance and development, argued on “Cavuto: Coast to Coast,” Tuesday that “we are now living with that inflation because policymakers have chosen to allow it.”
He made the argument four days after it was revealed that inflation remained painfully high in May with consumer prices hitting a new four-decade high that exacerbated a financial strain for millions of Americans.
FED RAISES INTEREST RATES BY A HALF POINT FOR FIRST TIME IN 20 YEARS AS IT RATCHETS UP INFLATION FIGHT
The Labor Department said Friday that the consumer price index, a broad measure of the price for everyday goods, including gasoline, groceries and rents, rose 8.6% in May from a year ago. Prices jumped 1% in the one-month period from April. Those figures were both higher than the 8.3% headline figure and 0.7% monthly gain forecast by Refinitiv economists.
The figure marks the fastest pace of inflation since December 1981.
The dismal May inflation report has some Wall Street economists betting that the Federal Reserve will raise interest rates by 75-basis points this month or next as policymakers try to tame runaway consumer prices.
“I think the Fed has wanted to take this very convenient path until now, which is let the markets do the tightening so that it’s orderly, but that ship has sailed several months ago,” Okamoto argued.
“Markets used to have better understanding of what the terminal rate was supposed to be last year, but the Fed has been so late and inflation is starting to get entrenched,” he went on to argue.
“Now markets are presuming the terminal rate is much higher to whip inflation into place, so that is why we have chaos in the markets.”
Okamoto then argued that he believes “the Fed has to get ahead of markets in this scenario” and that, as a result, at least a 100-basis point increase in rates is necessary.
He then warned that “the window for pursuing this option is closing” – explaining that, the longer the Fed waits, the more the central bank will have to take aggressive action to curb inflation – which he said will be “even harsher on markets. “
HOW THE FEDERAL RESERVE MISSED THE MARK ON SURGING INFLATION
Federal Reserve Chairman Jerome Powell rebuffed the possibility of a 75-basis point interest rate hike at the beginning of May following a policymakers’ meeting at which they voted to lift rates by a half-point. Officials have signaled that half-point rate hikes are on the table in June and July, although it’s unclear how Friday’s report could affect that.
Okamoto pointed to wholesale price data released Tuesday, which accelerated again in May as inflation tightened its strangehold on the US economy, adding to the financial pressure on millions of Americans.
The Labor Department said Tuesday that its producer price index, which measures inflation at the wholesale level before it reaches consumers, climbed 10.8% in May from the previous year. On a monthly basis, prices grew by 0.8%. Although that was slightly lower than the 10.9% forecast from Refinitiv economists, the reading – near a record-high of 11.5% notched in March – suggests that inflationary pressures in the economy remain strong.
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Okamoto argued that the data released on Tuesday suggested that inflation could rise higher than 9%.
FOX Business’ Megan Henney contributed to this report.