Moody’s Analytics chief economist Mark Zandi has some ideas for Jerome Powell
By Anne Kates Smith – Kiplinger
As the next Federal Reserve meeting approaches, many are waiting in anticipation to learn how the Federal Reserve is going to approach the federal funds rate, particularly as we get into the fall. If cut, lower interest rates are expected to have seismic ripple effects on the rest of the economy, potentially boosting stock prices and kicking the housing market into a frenzy.
For one economist, a rate cut couldn’t come soon enough — and it might even be overdue, he argues, based on how the Fed looks at inflation to make decisions. Mark Zandi, chief economist at Moody’s Analytics, says the Federal Reserve uses a flawed benchmark to analyze inflation trends, which could affect how the department decides whether or not to cut rates.
Here, Zandi talks to Kiplinger about what he thinks the Fed gets wrong on inflation, what he’d like them to do instead, and what he predicts will happen going forward.
KIPLINGER: You’ve said the Fed is using the wrong gauge for inflation and targeting the wrong level. What do you mean, and what would you prefer?
ZANDI: The Fed targets 2% inflation as measured by growth in what’s known as the personal consumption expenditures deflator. At the current time, it’s a flawed measure of inflation because it includes something called owners’ equivalent rent. That’s the implicit rental cost of owning your own home — it tries to measure what a homeowner would have to pay in rent to live in their home.