Rogoff Sees Fed Hiking Rates Up to 5% as Things Are ‘Out of Control’

(Bloomberg) -- The Federal Reserve will have to raise interest rates to as much as 5% to ease the hottest inflation in four decades just as the world faces a “perfect storm” of potential recessions in the U.S., European Union and China, former International Monetary Fund chief economist Kenneth Rogoff said.

The idea that increasing rates by just 2% to 3% to slow inflation “is really unlikely -- I think they’re going to have to raise interest rates to 4% or 5% to bring inflation down to 2.5% or 3%,” the Harvard University professor said in an interview on Bloomberg Television on Tuesday with Lisa Abramowicz, Jonathan Ferro and Tom Keene. “There’s just a lot of uncertainty. I’m not going to say I know exactly what needs to be done. But it’s clear that things are way out of control.” 

Fed Chair Jerome Powell and his colleagues are expected to raise interest rates by 50 basis points on Wednesday and signal they’re on track to lift them to around 2.5% by the end of the year. But it’s not clear if that’ll be enough to tame inflation, which is running at more than three times the Fed’s 2% target. 

Rogoff spoke about the “risks of having a perfect storm” of recessions, where European economic growth contracts because of Russia’s war in Ukraine, China’s does the same due to “a failed Covid lockdown policy,” and the U.S. economy shrinks because the Fed “tightens too much, too fast.” 

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