Inflation is the 'big ghost in the attic' - but the Fed risks hurting poorer Americans by fighting it any harder, Wharton professor says

• Inflation is still looming over the US economy, Wharton professor Iwan Barankay warned.
• However, the Fed risks hurting poorer Americans if it continues to hike interest rates, he said.

The specter of inflation continues to haunt the US economy, but the Federal Reserve risks harming the poorest Americans if it keeps raising interest rates, a management professor at the Wharton School has warned.

"The big ghost in the attic is inflation," Iwan Barankay recently told Wharton Business Daily. "Prices are going up, the economy's getting too hot."

Inflation surged to a 40-year high of 9.1% in June, and clocked in at 7.1% in November, well above the Fed's annual target of 2%. The US central bank has reacted by hiking interest rates from almost zero in March to over 4% today, in the hope that higher borrowing costs will curb rising prices by tempering spending, investing, and hiring.

However, US companies are still hiring and wages continue to march higher, Barankay noted. That isn't entirely a bad thing, he emphasized, noting that many poorer Americans have seen real wage increases since the first quarter of 2020.

"If the federal bank turns up the interest rate more, this is just going to hurt more of the bottom 40% of the distribution in terms of employment and income," Barankay said.

The Fed has signaled rates could peak above 5% next year, and some experts have warned they could exceed 6%.

Another Wharton professor, Jeremy Siegel, has also cautioned the Fed may be going overboard in fighting inflation, and could cause an unnecessarily deep recession.

Barankay dismissed concerns about systemic risks — events with the potential to spark a collapse — that could rear their heads as financial conditions tightened. He noted that in 2008, the hidden danger was poor regulation of high-risk mortgage debt, but he doesn't see any similar threats today.

"I don't think there's anything hidden in a cupboard, like a skeleton, that will suddenly destroy the economy," he said.

Barankay praised the historic amount of monetary and fiscal stimulus handed out during the pandemic, noting it provided a "tremendous boost" for Americans in the bottom 50% of the income distribution.

He added that the aggressive stimulus by the Fed and Treasury has helped the US economy resume its longest expansion since World War II, ignoring the COVID-19 blip.

"This is completely new territory, so of course you all look for signs that this party can't go on forever," he said.

"We can talk doom and gloom and the recession when the numbers really indicate it," Barankay continued. "But at the moment, there's no indication of that happening right now."