Several economists are sounding the alarm, saying that inflation might be a bigger threat than what the Federal Reserve is anticipating, triggering difficult markets for the quarter ahead.

                By                    Yaёl Bizouati-Kennedy

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Wharton finance professor Jeremy Siegel told CNBC “We’re headed for some trouble ahead. Inflation, in general, is going to be a much bigger problem than the Fed believes.” He went on to warn that there are serious risks tied to rising prices, and that “there’s going to be pressure on the Fed to accelerate its taper process,” he told CNBC. “I do not believe that the market is prepared for an accelerated taper.”

Siegel added that the biggest threat facing the markets is Fed chair Jerome Powell stepping away from easy money policies much sooner than expected due to surging inflation. “We all know that a lot of the levity of the equity market is related to the liquidity that the Fed has provided. If that’s going to be taken away faster, that also means that interest rate hikes are going to occur sooner,” he said. “Both those things are not positives for the equity market.”

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Inflation as measured by the Labor Department’s consumer-price index was 5.3% in the 12 months through August, close to the highest in 12 years, The Wall Street Journal reported.

Lucaci believes the Fed will shock the system much sooner than people think, probably by the end of 2022. “The Fed backstopped this whole economy and I don’t think they can continue to do that,” he continued.

Stephen Roach, former Morgan Stanley Asia chairman, told CNBC he was worried that the impact of energy price spikes on China’s struggling supply chain will be the tipping point and warns of stagflation, a situation where economic growth falls yet inflation stays high. “It’s worrisome for the overall economic outlook and raises serious questions about the wisdom of central bank policies — especially that of the Federal Reserve,” he told CNBC.

Roach added that the likelihood of continued supply chain bottlenecks moving from one area to another is strikingly reminiscent of what we saw in the early 1970s, and suggests that inflation will stay at these elevated levels for longer than we thought.

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Last updated: October 4, 2021