Robert Shiller: Fed risks ’embarrassment’ if it fails to control inflation

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Central banks face the unenviable task of trying to cover decades of inflation without triggering severe recessions that could unleash worldwide misery. But Robert Shiller, a Nobel Prize-winning economist at Yale University, believes they have no choice but to hold the line.

“If we see prolonged inflation now, it will be embarrassing for this country, and it will further erode confidence in institutions,” Shiller said in an exclusive Before the Bell interview.

Shiller helped develop the leading measure of US housing prices and popularized a key method of valuing stocks. His latest book, however, examines how the stories we tell as a society can shape our economic future.

A big reason is that inflation is seen as a threat. If people believe that prices will continue to rise at a rapid pace, they will begin to demand higher wages. This will push companies to raise prices even further to protect their margins, fueling a cycle that may become increasingly difficult to control.

A recent report showing annual US consumer inflation at 8.3% has raised bets on Wall Street that the Federal Reserve could raise interest rates by a full percentage point for the first time in its modern history. Shiller believes a hike of this magnitude may be necessary given the scale of the problem facing the Fed.

An excerpt from our conversation is below. Lightly edited and condensed for clarity.

U.S. home prices are rising more slowly, but are still growing significantly. Do you think it’s fair to say the market is cooling?

I think so. It’s hard to predict these things, but the run we’ve seen in house prices since the bottom of 2012 has been remarkable—more than 10 years. It can’t last forever.

It is fueled by expectations, self-fulfilling prophecies. People think it’s going up, so they expect it to take a bigger amount. This has continued despite the Covid-19 epidemic.

Are we seeing the start of a healthy correction, or could it be more serious?

There could be a drop in prices, no doubt. I expect the decline in real inflation-adjusted house prices to be at least modest. But it is not something that should happen quickly.

Should the Federal Reserve be worried about the housing market?

I think the inflation rate is a matter of confidence. We don’t index everything to inflation because we believe we have a monetary authority so that it doesn’t get out of hand. If we see prolonged inflation now, it will be embarrassing for this country, and will further reduce trust in institutions. That’s bad for the economy. It’s bad for everyone, losing confidence.

Are you worried that we are heading into a long period of higher inflation?

To get people’s attention, to change inflation expectations, you would have to raise interest rates to a high level to get a sudden correction. So I don’t think inflation will return to 2% in a year. It’s not a good idea to be that aggressive.

At the upcoming Federal Reserve meeting, which I agreed on last time, it may increase by a percentage point. That’s quite a lot by historical standards, but not very drastic changes that would bring inflation down to 2%.

So do you think the Fed should push even harder to change expectations at this point?

I think a percentage point is a good number because people don’t expect the Fed to go beyond that. And if we go beyond that, the willingness to spend would be slower than we thought.

I would stay within the established framework of responding gradually. One percent seems about right. I don’t have the science to say that, but it seems that the public will take this measure as confirmation that the Fed is taking action against inflation, but not so dramatically that it will upset the balance of our economy.

The successful list of sports car manufacturer Porsche is moving forward with high ambitions, even as the market is hit by fears of a recession and alarm over major interest rate hikes by central banks.

The latest: Volkswagen ( VLKAF ) said Sunday it will target the valuation of its Porsche division at up to 75 trillion euros ($75.1 billion). This makes the initial public offering the second largest ever in Germany.

Volkswagen shares rose slightly before pulling back early Monday.

What happens next: Trading begins on the Frankfurt Stock Exchange on September 29. From now on, Volkswagen’s bankers will race to see how much demand they can make. The preferred shares that are being offered have a price between 76.50 and 82.50 euros.

The IPO is expected to generate interest due to the strength of the Porsche brand. In the first six months of the year, the company had revenues of almost 18 billion euros ($18 billion) and an operating profit of 3.5 billion euros ($3.5 billion).

But some potential investors may be left on the sidelines during a turbulent period while they reassess their strategies. Market conditions have been hampered by high energy prices in Europe, as well as a sharp rise in borrowing costs as the Federal Reserve and European Central Bank try to contain inflation.

Europe’s Stoxx 600 index is down nearly 17% year to date, while Germany’s DAX is 20% lower. Volkswagen stocks are down nearly 19% in 2022.

More Americans are saddled with credit card debt for longer, as emergency spending and the rising cost of living make it harder to pay off balances, according to a new survey.

The Breakdown: A survey of people with credit card debt released Sunday by Creditcards.com found that 60 percent of respondents with month-to-month debt owe their creditors for at least a year. This is an increase of 10 percentage points compared to last year.

“The percentage of people who have had credit card debt for at least a year has increased significantly,” said Ted Rossman, senior industry analyst at CreditCards.com.

Half of those with month-to-month credit card debt said they needed to borrow to cover an unexpected event, such as medical bills or car repairs. But 31% of Millennials cited everyday expenses as the main reason for their credit card debt.

This cohort could become increasingly strained as the cost of living remains high and interest rates continue to rise. According to the survey, the increase in costs would have a significant impact on 41% of all credit card holders, and more than half of those with debt.

Why it matters: Banks are keeping a close eye on whether the people and businesses they’ve lent money to are increasingly unable to pay them back. So far, they are not too concerned. It also helps that American credit card balances are down 4% compared to the end of 2019. But it is a weakness as economic growth slows and inflation persists.

AutoZone ( AZO ) reports results before US markets open. NAHB Housing Market Index September posts at 10am ET.

Tomorrow to come: London stock trading resumes after Queen Elizabeth II’s state funeral.