Former Chairman of the White House Council of Economic Advisers: High inflation is back, the Fed may raise interest rates to 6%

Kevin Hassett, chairman of the White House Council of Economic Advisers during the Trump administration, believes that the U.S. economy could be hit by another wave of inflation due to factors such as huge government spending and high energy costs.

In an interview on Aug. 29, Hassett said, "I think we're going to see a zigzag inflation cycle." We're going to see another wave of inflation, which will be spurred by strong economic growth and higher energy prices."

The former White House economist's comments come amid renewed optimism that disinflation will lead to a soft landing for the US economy, with inflation now well below the high of 9 per cent hit last summer. According to the latest CPI report, inflation was 3.2% in July, close to the Fed's 2% price target.

But Hassett warned that there are still lingering price pressures in the economy that could cause inflation to pick up. According to the Atlanta Fed's latest estimate, GDP will grow by nearly 6% in the third quarter, and Hassett sees a 30% to 40% chance that GDP will grow faster than real interest rates.

That pace of economic growth will spur inflation, with prices already rising in key sectors. Energy prices, which account for about 8 percent of the CPI, have risen, with the average price of a gallon of gas rising to $3.82 on Tuesday, according to AAA.

"You can't have lower inflation in this situation, and coupled with deficit spending, it's absolutely insane," Hassett said of the strong economic growth. He also said that given the latest data, inflation is likely to hover around 5%, well up from 3.2% in July.

"I think the Fed is going to have to raise rates further," Hassett said.

In Hassett's view, interest rates are "certain" to rise to 6%, a level not seen since December 2000, and one that most investors may not have factored into asset prices. As of now, investors see only a 5 percent chance that rates will hit 6 percent by the end of 2023, according to CME's FedWatch tool.

As financial conditions continue to tighten, higher rates could spell trouble for stocks and the economy. In 2022, the Fed's aggressive rate hikes sent stocks sharply lower, with the S&P 500 falling 20%. At the same time, it is also possible that high interest rates could push the economy into recession, with the New York Fed forecasting a 66 percent chance of the US economy entering a recession by July 2024.