Federal Reserve officials have spent the last week indicating rate hikes will continue in order to bring down rising prices — but this risks intensifying inflationary pressures, according to a Nobel Prize-winning economist.
“The real worry in my mind is, will they increase interest rates too high, too fast, too far?” Joseph Stiglitz told CNBC’s Steve Sedgwick Friday at the Ambrosetti Forum in Italy.
The Columbia University professor, author of “The Price of Inequality” and “Globalization and Its Discontents,” said that while there did need to be an adjustment from the zero or near-zero interest rate policy that has prevailed since 2008, there were three reasons an aggressive Fed course could stoke inflation.
The first is that the overwhelming source of inflation, by Stiglitz’s analysis, is supply-side disruptions leading to higher prices in oil and food, even causing a shortage of baby formula.
“Will raising interest rates lead to more oil, lower prices of oil, more food, lower prices of food? Answer is clearly not. In fact, the real risk is it will make it worse,” he told CNBC at the economic conference held on the shores of Lake Como.
“Why? Because what we need to do is to make investments to relieve some of these supply-side bottlenecks that are causing such havoc on our economy. It’s going to make it more difficult.”
The second reason, Stiglitz said, was evidenced by the fact that margins for major corporations have been rising along with their input costs.
“They’ve not only been passing on the cost but passing it on even more. There’s a well-defined theory that points out that when interest rates go up, firms … take more advantage of raising prices today.”
“So raising interest rates in non-competitive markets may lead to even more inflation,” he said.
Finally, he continued, there is the potential for increasing costs in an important component of inflation: housing.
“You raise interest rates, it gets reflected in rents, and there’s a Federal Reserve study showing that,” he said.
The Federal Reserve raised its benchmark rate by 0.75 percentage points in both June and July.
In a speech on Aug. 26, Fed Chair Jerome Powell said that while higher rates, slower growth and softer labor market conditions would bring down inflation, that would also mean “some pain” for households and businesses.
Stiglitz had further concerns about the U.S. economy’s impact on citizens.
One was that interest rates will continue to be raised faster than house prices fall — “prices are remaining high, they’re not going to come down as fast as interest rates are going up and that’s going to increase the intergenerational divide in our society,” he said.
Another was that recent U.S. job market data, which on Friday showed nonfarm payrolls rose by 315,000 in August despite slowing economic growth, does not indicate as much strength as some have suggested.
“One indicator that they are not really capturing is what is going on with real wages, which normally go up when labor markets are tight,” he said.
Real wages refers to wages adjusted for inflation.
“Labor markets are very tight, prices of goods are going up, that should mean you compensate workers even more but that’s not happening,” Stiglitz noted.
“Real wages are going down, so that at least should make you worry,” he added.
Banks in Singapore raised housing loan rates in June, following the U.S. Federal Reserve’s decision to increase interest rates by 75 basis points in the same month to cool inflation — its most aggressive hike since 1994.
Nurphoto | Nurphoto | Getty Images
Homeowners in Singapore are starting to tighten their belts as they will soon face higher mortgages, thanks to rising interest rates.
The country’s three largest banks raised housing loan rates in June, following the U.S. Federal Reserve’s decision to increase interest rates by 75 basis points in the same month to cool inflation — its most aggressive hike since 1994.
DBS raised rates on its two- and three-year fixed packages to 2.75% per annum; OCBC increased its two-year fixed rate to 2.98%; and UOB its three-year fixed rate package to 3.08% per annum. Rates have been on the rise since late last year, when three-year fixed rates were at 1.15%.
Property experts are saying the increase in rates is not surprising.
A housing loan with a rate of about 2% interest is considered “super cheap,” said Christine Li, head of research for Asia-Pacific at Knight Frank.
Homeowners with an existing property would have “enjoyed two years of very low mortgage rates, and now it’s just the normalization (period from) two or three years ago,” she said.
But residents who own private properties and have their mortgages tied to a bank loan are starting to feel the pinch.
Tan, 34, who works in a software company and wanted to be referred to only by her last name, and her husband, 36, bought a condominium in 2021 for 1.75 million Singapore dollars ($1.26 million). They applied for a SG$1.31 million two-year fixed-rate mortgage from a local bank with 1.1% interest.
Tan said she initially felt relieved when she heard the news as they would not be affected immediately. But panic set in when she realized their mortgage could increase around the end of 2023 when their fixed-rate ends.
The couple currently pays SG$4,274 a month for their mortgage and expects it to “go up quite significantly,” she said.
“What we would have to do is cut back on spending on unnecessary things — [fewer] meals at restaurants, less shopping, and how much wine we buy on a monthly basis,” Tan said.
Two scenarios for public housing owners
The situation is similar for Singaporean owners of public housing apartments — known locally as HDB flats — whose mortgages are likewise tied to bank loans, rather than the country’s public housing authority.
Regine, 25, who works as a public affairs executive and wanted to be referred to only by her first name, belongs to the first group. She bought a SG$482,000 four-room resale apartment in 2020 with a five-year fixed rate package from DBS with 1.4% interest.
“We’re still early into our lease, so it is a relief that we locked in a good deal and that we are safe for the next few years,” Regine said. “Interest rates are crazy now.”
“The markets are very volatile now, so we’re hoping that interest rates will stabilize in the next five years and the bank rates will not be higher than HDB rates,” she added.
When asked about how the couple would be able to cope if interest rates remain high in the coming years, she said they would “still be very comfortable” as they did not spend above their means on the house.
Knight Frank’s Li estimated that Singapore residents who own public housing could see their monthly mortgages increasing by $200 to $300 with the current rate hike.
But flat owners who opted for a HDB housing loan instead of a bank loan may be in a better situation.
Their loan comes with 2.6% interest — lower than the bank loan packages.
Samantha Pradeep, 31, who owns a SG$380,000 five-room flat with her husband, said she felt at ease with their decision to opt for an HDB loan despite bank loan rates being “slightly more attractive” in 2017 when they purchased the house.
“It was a neck and neck fight between the bank and HDB loan five years ago, but it’s a lot more different now,” she said. “If we had taken a bank loan, it would have affected our finances quite greatly right now.”
Singapore introduced new measures in mid-December aimed at cooling the country’s red-hot private and residential property market. It raised taxes on second and subsequent property purchases, and imposed tighter limits on loans.
The government also said it will increase the supply of public and private housing to cater to the strong demand, the Ministry of National Development reported in the same month.
Across the border
In Malaysia, mortgage prices have been relatively stable.
The country’s central bank hiked interest rates on July 6 by 25 basis points, but property experts said the increase will not move the needle much on mortgage prices.
Ng Wee Soon, a Malaysian who owns two investment properties in Johor Bahru that cost about 500,000 Malaysian ringgit ($112,000) each, said the increase in mortgage loans may cost him “about $100 per property.”
People with multiple properties will have their cash outlay eaten into every month as mortgage rates rise, said Knight Frank’s Li. “But if the rental market is resilient … investment property owners are able to adjust the rental rates to have higher returns on rental yields.”
However, Ng said with Malaysia’s economy still recovering from the pandemic and the country’s housing surplus, he would rather “absorb the cost of higher mortgages, rather than raising rent.”
— CNBC’s Abigail Ng contributed to this report.
HARARE, Zimbabwe — Zimbabwe has launched gold coins to be sold to the public in a bid to tame runaway inflation that has further eroded the country’s unstable currency.
The unprecedented move was announced Monday by the country’s central bank, the Reserve Bank of Zimbabwe, to boost confidence in the local currency.
Trust in Zimbabwe’s currency is low after people saw their savings wiped out by hyperinflation in 2008 which reached 5 billion%, according to the IMF.
With strong memories of that disastrous inflation, many Zimbabweans today prefer to scramble on the illegal market for scarce U.S. dollars to keep at home as savings or for daily transactions. Faith in Zimbabwe’s currency is already so low that many retailers don’t accept it.
The central bank disbursed 2,000 coins to commercial banks on Monday. The first batch of the coins was minted outside the country but eventually they will be produced locally, according to the governor of the Reserve Bank of Zimbabwe, John Mangudya.
The coins can be used for purchases in shops, depending on whether the shop has enough change, he said.
“The government is trying to moderate the very high demand for the U.S. dollar because this high demand is not being matched by supply,” said Zimbabwean economist Prosper Chitambara.
“The expectation is that … there will also be moderation in terms of the depreciation of the local currency, which should have some kind of stabilizing effect in terms of pricing of goods,” he said.
Any individual or company can buy the coins from authorized outlets such as banks, according to an announcement by the country’s central bank.
People can buy the gold coins from authorized agents such as banks using the local currency or foreign currencies and purchasers can choose to keep the coins at a bank or take them home. Foreigners can only buy the coins in foreign currency, said the central bank.
Called Mosi-oa-Tunya, which in the local Tonga language refers to Victoria Falls, the coins “will have liquid asset status, that is, it will be capable of being easily converted to cash, and will be tradable locally and internationally. The coin may also be used for transactional purposes,” said the central bank. People holding the coins can only trade them for cash after 180 days from the date of buying, the bank said.
The coins, each weighing one troy ounce with a purity of 22 carats, can also be used as security for loans and credit facilities, said the central bank. The price of the coins will be determined by the international market rate for an ounce of gold, plus 5% for the cost of producing the coin. At the time of the launch Monday, the cost of Mosi oa Tunya coin was $1,824.
Internationally, gold coins are used in countries such as China, South Africa and Australia to hedge against inflation and as an investment opportunity, although they are not as widely used as currency as envisaged by Zimbabwe’s central bank, said Chitambara.
“For Zimbabwe we are in chronic hyperinflation so the expectation is that there will be a huge uptake of these gold coins,” he said. However, most Zimbabweans struggle with daily survival and won’t be able to buy them, he said.
“For the common man, there is not really much to benefit directly from this, especially if you don’t have any excess cash,” said Chitambara.
“Many people have no money for bread, let alone for savings,” he said. “The expectation is that indirectly it will benefit the ordinary person through moderating the prices.”
Companies with excess cash can find the coins useful to store value and also as an alternative investment asset, although individuals and companies are likely to continue preferring the dollar because “it is convenient and highly liquid,” he said.
Selling the coins in fast depreciating local currency could also result in “rent-seeking behavior, speculation and arbitrage within the economy,” as some could buy using local currency and then sell in dollars later, he said.
The fact that Zimbabwe’s central bank would have to buy the gold from miners of the metal such as informal artisanal miners could also present challenges and result in increased smuggling, analysts say.
“Gold deliveries in Zimbabwe have significantly recovered because of the appetizing U.S. dollar payments offered to artisanal miners,” noted securities firm Morgan & Co in a market intelligence report.
“However, should there be a disparity between the amount of U.S. dollars used to purchase the gold from miners and the U.S. dollars used to pay for the coins, this could squeeze the central bank and its intermediaries’ foreign currency reserves. If this ripples to artisanal gold miners, this could result in low deliveries to Fidelity Printers and increase gold smuggling activities,” noted the Morgan report. Fidelity Printers, a subsidiary of the central bank, is the country’s only authorized gold buyer.
Zimbabwe has substantial gold deposits and exports of the precious metal is one of the southern African country’s major foreign currency earners. Gold production improved to about 30 tons in 2021, compared to 19 tons in 2020, according to official figures. Small–scale producers such as poorly regulated artisanal miners contributed 19 tons of the gold delivered in 2021, according to official figures.
Gold smuggling has been rampant. The country is estimated to be losing about $100 million dollars worth of gold monthly to smuggling, home affairs minister Kazembe Kazembe has said. Smuggling is costing the country about 36 tons of gold annually, according to a report issued this month by the Center for Natural Resource Governance, a local natural resources watchdog. Legally all gold mined in Zimbabwe is supposed to be sold to the central bank, but many producers prefer to smuggle the gold out of the country in order to get payment in U.S. dollars.
Markets have been on a wild ride recently, swinging between gains and losses. However, the brutal selling has meant the S&P 500 is still in a bear market.
When asked whether markets have hit a bottom, Wall Street veteran Ed Yardeni said he doesn’t think “we’re gonna climb out of this thing very quickly, not in a fundamental sense.”
“I think investors have learned this year — ‘don’t fight the Fed,'” he told CNBC’s “Street Signs Asia” on Monday. The mantra refers to the idea that investors should align their investments with, rather than against, the U.S. Federal Reserve’s monetary policies.
What changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation.
Ed Yardeni
president, Yardeni Research
“For many years, the idea of don’t fight the Fed was if the Fed was going to be easy [on monetary policy.] You want to be long equities,” said Yardeni, president of consultancy Yardeni Research. “But what changed dramatically this year is ‘don’t fight the Fed’ now means don’t fight the Fed when it’s fighting inflation. And that means that that’s not a good environment for equities on a short-term basis.”
‘Too late to panic’
With inflation soaring to new highs this year, the Fed raised interest rates by 75 basis points last week — its biggest since 1994 — and signaled continued tightening ahead. Fed Chair Jerome Powell said another hike of 50 or 75 basis points at the next meeting in July is likely.
However, the economy now faces the risk of stagflation as economic growth tails off and prices continue to rise.
Wall Street has tumbled in response to the Fed’s tightening and rapidly rising inflation. The S&P 500 last week posted its 10th down week in the last 11, and is now well into a bear market. On Thursday, all 11 of its sectors closed more than 10% below their recent highs. The Dow Jones Industrial Average fell below 30,000 for the first time since January 2021 this past week.
Yardeni said it “isn’t going to be over” till there are definitive signs that inflation, brought on by soaring food and energy prices, has peaked. Market watchers have also blamed rising prices on the Fed’s fiscal overstimulation of the economy amid the Covid-19 pandemic.
“We’ve got to see a peak in inflation before the market will be substantially higher,” he said, adding that point could come next year.
Still, Yardeni believes that markets “are kind of at an exhaustion stage” in the selling.
“At this point, it’s a little too late to panic. I think long-term investors are going to find that there’s some great opportunities here,” he told CNBC.
A recession that will ‘hurt the rich’
Rumblings of the possibility of a recession have been getting louder, as doubts surface about the Fed’s ability to achieve a soft landing. A bear market often portends — but doesn’t cause — a recession.
“This will be the first recession that hurts the rich probably for a pretty long while, more than it hurts the ordinary person on the street,” said Mark Jolley, global strategist at CCB International Securities.
“If you look at what’s happened to bond and equity prices and look at the combined decline in bond and equity prices, we are on track to have the worst year already of wealth destruction since 1938,” he told CNBC’s “Squawk Box Asia” on Monday.
As interest rates go higher, the value of people’s assets bought with borrowed money will fall, Jolley said, suggesting that mortgages are at risk.
“Anything in the economy that is leveraged and long, which is basically private equity, your collateral has gone down 20%,” he said. “Imagine what would happen to the banking system in any economy if your house prices fell by 20%.”