The 'Great Inflation' won't be over until the Fed says so and stops hiking interest rates, chief economist says

• Inflation may be cooling but it's soon to declare victory, a chief economist says.
• The threat isn't over until the Fed says so and stops hiking rates, Vincent Reinhart said.

US inflation may have cooled in March, but it's soon to say the threat is officially over, a veteran economist says.

"We can't declare victory yet. The 'Great Inflation' isn't over until the Fed says it is because they don't need to raise rates anymore," Vincent Reinhart, chief economist at Dreyfus & Mellon, told Bloomberg on Thursday.

"Once we get a run in which inflation is close to goal and people don't care much about inflation, then it's behind us," he added.

Inflation, which spiked to a 40-year high last summer, appears to be slowing. The Consumer Price Index, the benchmark measure for the rate of US price growth, increased 5% year-over-year in March, compared to 6% in February.

That's the lowest rate since May 2021, according to the Bureau of Labor Statistics.

Inflation may be cooling because the Federal Reserve's chairman, Jerome Powell, and his colleagues have hiked interest rates from nearly zero to upwards of 4.75% in the past year or so. Higher rates make borrowing more expensive and encourage saving over spending, which can curb the pace of price increases. However, they can also sap demand, increase unemployment, and cause a recession.

Traders are pricing in a 69% chance the central bank will increase rates by another 25 basis points at its May meeting, and a 31% chance that it pauses rate hikes, according to the CME FedWatch tool.

According to Reinhart, the "real risk" is the Fed declares victory over surging price pressures too early, especially if its hikes start to choke the economy. "It will get harder from here on as the unemployment rate starts rising," he said.

"What happens in about three, four months when we get another string of good readings on inflation and troubling readings on unemployment? The Fed may declare victory," Reinhart added.