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Inflation: The 'disease is still worse than the cure,' economist says

S&P Global Chief U.S. Economist Beth Ann Bovino joins Yahoo Finance Live to discuss the expectations for the upcoming FOMC meeting, rate hikes, inflation, and the outlook for markets.

Video Transcript

JULIE HYMAN: And as we continue to look towards this week's FOMC meeting, our next guest says the Fed is by no means finished with its aggressive rate policy and expects rate hikes to push forward into 2023. Let's welcome in S&P Global Chief US economist Beth Ann Bovino. Beth Ann, it's good to see you as we watch this sort of slight choppiness, shall we say, ahead of the FOMC decision later this week. Even as there is broad expectation that the Fed's going to continue to raise rates, there are also some who are questioning the strategy here at a time when there's concern over global growth and growth here in the US and questions about whether the Fed is sort of attacking the right input of inflation by raising rates.

How do you view that question?

BETH ANN BOVINO: Well, the Fed has a mandate-- two mandates. One is managing having job gains at maximizing employment. We can say they certainly have done that. The second thing is stable inflation. And we are nowhere near that looking at the CPI numbers that came out last week, which showed by no means stabilization-- particularly, the core CPI, which has now climbed higher and is at three times the Fed's target. So whatever mandate, whatever inflation target you look at, it's going in the wrong direction. And that's why the Fed needs to move.

In terms of growth, yes, it will slow growth dramatically. And we see the risk of recession next year as a toss up. But the Fed still has to fight. It still has to fight inflation. And I would say right now that the disease is still worse than the cure.

- What should consumers expect in terms of the actual fullness of the Fed's policy and their pathway and the decision-making within their hikes. What should they expect in terms of a timeline as to that being fully ingested into the economy? And when the consumers, themselves, can perhaps take a breather at the Fed being done at tackling inflation?

BETH ANN BOVINO: Well, I think the Fed is pushing the levers to have the consumers respond. When you see these incredibly high prices, that certainly means that demand slows down. But when you add to that higher interest rates, which also increases borrowing costs, that's a twofold-- so that you could start to see demand slowing down rather dramatically most likely next year. We already see it in housing, as you just had mentioned. We'll start to likely see it in other areas.

And when demand slows down, businesses also start to say, well, maybe we don't need as many workers. You see the unemployment rate tick up a bit. And that means the economy slows dramatically, and with that, prices. But I don't think the impact is really going to be felt until sometime next year. Because as somebody said on this call, that inflation is still around a 40-year high. It's going to take some time to get down.

- One of the components though, of that homebuilder confidence as well, is supply chain issues and just being able to get the necessary inventory and able to complete some of the housing starts and projects there as well. And so with all of that in mind, the things that are out of the Fed's control, are we seeing any improvement on that front?

BETH ANN BOVINO: Well, we are. Again, as you had just said very well, that it is not in the Fed's control. The Fed can't make oil, can't make cars. All they can do is slow demand. And that's their only measure that they can move. Now in terms of supply chain disruptions, it's still a major problem. It's one of the biggest factors that are causing this where we are today.

We have seen some signs of softness, some signs of moderation. But nowhere near what we need to get to. That, to me, says that inflation, as you ask what consumers are thinking and what they can hope for, I don't see inflation getting down to even close to the Fed's target until sometime next year, or maybe even the following.

JULIE HYMAN: So as rates go up, as we see growth start to slow, it feels as though-- and this is something that Brad brought up earlier-- that all of this is going to hit lower income households the hardest. But do you see it also starting to bite middle income, even upper middle income households as this goes on?

BETH ANN BOVINO: Well, I guess the good news, particularly for lower income households, who most of their share of income goes into transport, if they have a car. And so we have seen gasoline prices moderate-- still high, but come down. I believe for the last 12 weeks they've been coming down. So that will certainly help with their purchasing power in other arenas. But where other areas are being squeezed, housing. It's not just in home sales, which we know home prices have skyrocketed.

And now add to that, interest rates are also incredibly high. So that's squeezing many people out of the market. We see that about 60% of households are now squeezed out of the market in terms of buying a home. Not just lower income, it's going into the middle income bracket as well. But for lower income households who usually rent homes, that now, according to HUD data, is at the worst in the history of the data that HUD tracks.

So in that sense, lower income households are squeezed dramatically. It is climbing up the chain of the income strata. But right now, who gets the brunt? Lower income households

- Beth Ann, it's always a pleasure to speak with you and really get some perspective around how the markets are digesting and anticipating what the Fed may do in their policy decision. Beth Ann Bovino, S&P Global Chief US economist, thanks so much for joining us this morning.

BETH ANN BOVINO: Thanks.