Inflation Surge: Fed Policy Implications from Maryland Smith's David Kass

Clinical Professor of Finance David Kass at the University of Maryland’s Robert H. Smith School of Business, comments, below, on inflation rising 6.8% from a year ago in November, slightly higher than estimates, according to the consumer price index released Friday.

Kass has served as an economist in senior positions with the Federal Trade Commission, General Accounting Office, Department of Defense, and the Bureau of Economic Analysis. He also is active on Twitter (@DrDavidKass) and blogs about Warren Buffett, Berkshire Hathaway and the stock market.  

Kass says: 

“The Federal Reserve's preferred measure of inflation is the personal consumption expenditure price index. Its latest monthly report, released on November 24, 2021, indicated a price increase of 5.0% over the previous 12 months.

“The Fed also focuses on the core CPI (less food and energy) which is up 4.9% over the past year. This contrasts with the overall CPI which is up 6.8% over the past 12 months.

“Since these inflation numbers exceed the Federal Reserve's inflation target of 2%, the result is likely to be an acceleration of the planned tapering of its purchases of U.S. Government bonds and mortgage-backed securities, and a subsequent earlier date for raising interest rates.

“I expect the Federal Reserve to raise short term rates four times, by 1/4% each time, during 2022, raising the Federal Funds rate from 0-to-1/4% to 1-to-to-1 1/4%. With the unemployment rate down to 4.2% in November 2021 from 14.8% in April 2020, the Federal Reserve can satisfy its joint mandate of maximizing employment and price stability by beginning to raise interest rates in 2022.

Economy, Stock Market Outlook

“Since much of the inflation in the economy is a result of short-term supply chain bottlenecks, I would expect inflation in 2022 to gradually return to its historical average of about 3%. The stock market should continue to do well in 2022, with the economy continuing to recover from the pandemic.”