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$3 trillion in extra savings may push Fed rate hikes too far: Economist

·Anchor
·2 min read

Americans were sitting on $815.3 billion worth of savings as of April.

This may be good news for consumers individually, but bad news for the Federal Reserve, whose efforts to slow inflation could be delayed by this extra pile of cash lying around.

"The problem is there is so much cash on household sector balance sheets and corporate sector balance sheets that it’s going to take more rate hikes to slow the economy down, simply because the starting point is a level of cash that is much higher than we’ve ever seen before," said Torsten Slok, chief economist at Apollo Global Management, in an interview with Yahoo Finance Live.

Slok said the total amount of household and corporate cash in checking accounts is about $3 trillion higher than pre-pandemic trends would've suggested.

The Fed has been raising interest rates to try to decelerate demand growth, and, in turn, inflation. This process typically takes time, as slowing demand trickles down to price stability.

“The risk is that interest rates have to go up more…because it will take time for the Federal Reserve to succeed in cooling things down when there is so much cash among investors,” Slok said.

On the consumer side, people are spending that cash, even as the way they’re spending is changing, shifting from buying stuff to travel and entertainment.

The highest number of individuals are flying in the U.S. since before the pandemic, with 2.5 million passing through Transportation Safety Administration checkpoints on Sunday. And Slok highlighted robust hotel occupancy and restaurant reservation data.

With headline consumer inflation at 8.6% as of May, the Fed doesn’t have the luxury of time to wait and see what effect their initial rate increases will have. The central bank targets 2% inflation.

U.S Federal Reserve Board Chair Jerome Powell testifies before a House Financial Services Committee hearing in Washington, U.S., June 23, 2022. REUTERS/Mary F. Calvert
U.S Federal Reserve Board Chair Jerome Powell testifies before a House Financial Services Committee hearing in Washington, U.S., June 23, 2022. REUTERS/Mary F. Calvert

“So there is absolutely no other option for the Fed than to step on the brakes to try to cool inflation,” said Slok.

Just another reason why economists are increasingly sounding the alarm on the Fed tipping the economy into recession.

Julie Hyman is the co-anchor of Yahoo Finance Live, weekdays 9am-11am ET. Follow her on Twitter @juleshyman, and read her other stories.

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