'The Fed is doing the correct thing,' says Raymond James' Chief Economist
Prices have risen dramatically since the pandemic as the Fed cut interest rates and households built up their cash reserves while staying at home and cashing stimulus checks. The increase in demand, coupled with supply chain shortages and increased production costs, has caused inflation to soar to multi-year highs.
In an interview with Yahoo Finance's Julie Hyman and Brad Smith, Raymond James Chief Economist Eugenio Aleman said, "The Fed is doing the correct thing. Interest rates on savings are going up, so that will put pressure on consumers between consuming and saving, which is something that we haven't had for the last 20 years or so."
Noting that dilemma between spending and consuming, Aleman says, "The biggest issue today is the consumer because we have seen that residential investment has been down for the last six consecutive quarters. So that has not been able to bring down the economy because consumption has been relatively strong last year".
In addition to the consumer's decision to spend or save, Aleman notes that consumption funded through high-cost debt is also a problem. Aleman says the Fed is also looking for a slowdown in credit card borrowing, which hit an all-time high in the fourth quarter of 2022.
Key video Moments:
00:00:01 What's causing stubborn inflation
00:00:44 Is the Fed doing the right thing?
00:00:58 Interest rates on savings
00:01:25 The Federal Reserve and credit card borrowing
Watch our full conversation with Eugenio Aleman here.
Video Transcript
- The biggest issue today is the consumer, because we have seen that residential investment has been down for the last six quarters-- consecutive six quarters. So that has not been able to bring down the economy, because consumption has been relatively strong. Last year, exports were very, very strong because of exports of natural gas to Europe.
So today, what we are waiting for is for employment to weaken and then consumer demand weaken-- not by a very large amount, but slowdown in consumer expenditures. The Fed is doing the correct thing-- interest rates on savings are going up. So that will put pressure on consumers between consuming and saving, which is something that we haven't had for the last 20 years or so, right?
Interest rates on savings accounts have been so low that consumers will decide to consume rather than save. Today, they have these alternatives. I mean, if you slow down saving, if you slow down consuming, you can get reasonably high interest rates on savings. So I think that is what the Fed is playing with interest rates today.
The second portion is credit card lending. Credit card lending is the only component of lending that has been growing too fast for the Fed's pace. And I think that is one of the targets that the Fed is moving forward today-- slowing down credit card borrowing, because it is the most expensive part of borrowing.
