Robert Shiller: Fed risks ‘disgrace’ if it doesn’t control inflation

Central banks are faced with the unenviable task of trying to put a lid on decades-high inflation without triggering harsh recessions that could unleash misery around the world. But Robert Shiller, a Nobel Prize-winning economist at Yale University, thinks they have no choice but to hold the line.

“If we do see protracted inflation now, it will be a disgrace to this country, and it will lower trust in institutions even more,” Shiller told Before the Bell in an exclusive interview.

Shiller helped develop the leading measure of US home prices and popularized a key method for valuing stocks. His most recent book, however, looks at how the stories we tell ourselves as a society can shape our economic future.

It’s a big reason inflation is seen as such a threat. If people think prices will continue to rise at a fast pace, they’ll start demanding higher wages. That will push businesses to raise prices even more to protect their margins, feeding a cycle that can become increasingly difficult to control.

Since the latest report showing annual consumer inflation in the United States is stubbornly high at 8.3%, bets have risen on Wall Street that the Federal Reserve could hike interest rates by a full percentage point for the first time in its modern history. Shiller thinks a hike of that magnitude may be necessary given the magnitude of the problem the Fed is facing.

An excerpt from our conversation is below. It’s been lightly edited and condensed for clarity.

US housing prices are rising at a slower clip, but they’re still increasing sharply. Do you think it’s fair to say that the market is cooling down?

I think so. It’s hard to predict these things, but this has been a remarkable run that we’ve seen in home prices since the bottom in 2012 — over 10 years. It can’t go on forever.

It’s been driven by expectations, self-fulfilling prophecies. People think that they’re going up, and so they expect that they have to take the higher amount. That has continued, even through the epidemic of Covid-19.

Are we seeing the beginning of a healthy correction, or could it be more severe?

There could be a decline in prices, certainly. I expect that there will at least be a modest decline in real inflation-corrected home prices. But it’s not something that has to happen quickly.

Should the Federal Reserve be worried about the housing market?

I think that the inflation rate is a matter of trust. We don’t index everything to inflation because we think that we have a monetary authority that will keep it from getting out of hand. If we do see protracted inflation now, it will be a disgrace to this country, and it will lower trust in institutions even more. That’s bad for the economy. It’s bad for all of us, a loss of trust.

Are you worried that we’re moving into a prolonged period of higher inflation?

To get the attention of people, to change their expectations for inflation, you would have to raise interest rates to a high level, to get a sudden correction. So I don’t think that inflation will be back down to 2% in a year’s time. It’s not a good idea to be that aggressive.

The coming Federal Reserve meeting, last time I got a feel for the consensus, it might be increased one percentage point. That’s pretty big by historical standards, but it’s not the super drastic changes that would bring inflation down to 2% right away.

So you think the Fed might need to go even harder to change expectations at this point?

I think one percentage point is a good number, because people don’t expect the Fed to go beyond that. And if they do go beyond that, it would be more dampening of willingness to spend than we would have thought possible.

I would stay within the framework that they’ve established of responding gradually. One percent seems about right. I don’t have any science to say that, but it seems like the public will take that measure as confirming their belief that the Fed is taking action against inflation, but it’s not so dramatic that it will disturb equilibrium in our economy.

Volkswagen is targeting a $75 billion valuation for Porsche

The blockbuster listing of sports car maker Porsche is moving forward with lofty ambitions, even as markets churn due to recession fears and alarm over big interest rate hikes by central banks.

The latest: Volkswagen said Sunday that it’s targeting a valuation for its Porsche division of up to 75 billion euros ($75.1 billion). That sets up the initial public offering to be the second largest in Germany ever.

Volkswagen shares rose slightly early Monday before falling back.

What happens next: Trading is set to begin on the Frankfurt Stock Exchange on Sept. 29. Between now and then, Volkswagen’s bankers will be racing to see how much demand they can drum up. The preferred shares that are being offered have been priced between 76.50 euros and 82.50 euros.

The IPO is expected to generate interest because of the strength of the Porsche brand. In the first six months of the year, the company reported nearly 18 billion euros ($18 billion) in revenue and 3.5 billion euros ($3.5 billion) in operating profit.

But some potential investors may opt to stay on the sidelines as they reconsider their strategies during a tumultuous period. Market conditions have been hampered by sky-high energy prices in Europe, as well as a sharp uptick in borrowing costs as the Federal Reserve and the European Central Bank try to rein in inflation.

Europe’s Stoxx 600 index has shed nearly 17% year-to-date, while Germany’s DAX is 20% lower. Stock in Volkswagen has dropped almost 19% in 2022.

Americans are getting stuck with credit card debt for longer

More Americans are saddled with credit card debt for longer periods of time as emergency expenses and the rising cost of living make it harder for them to pay down their balances, according to a new survey.

Breaking it down: A poll of people with credit card debt published Sunday by found that 60% of respondents who carry debt from month to month have owed their creditors money for at least a year. That’s an increase of 10 percentage points versus last year.

“The percentage of people who have been in credit card debt for at least a year increased substantially,” said Ted Rossman, senior industry analyst for

About half of credit card holders who carry debt from month to month said they had to borrow to deal with an unexpected event like medical bills or car repairs. But 31% of Millennials pointed to daily expenses as the main reason for their credit card debt.

That cohort could come under growing strain as the cost of living stays elevated and interest rates continue to climb. The survey found that rising costs would have a major impact on 41% of total credit card holders, and on more than half of those with outstanding debts.

Why it matters: Banks are keeping close watch on whether the people and companies they’ve lent money to will increasingly become unable to pay them back. So far, they’re not too concerned. It also helps that American credit card balances are down 4% compared to late 2019. But it’s a vulnerability as economic growth slows and inflation lingers.

Up next

AutoZone reports results before US markets open. The NAHB Housing Market Index for September posts at 10 a.m. ET.

Coming tomorrow: Stock trading in London will resume following the state funeral for Queen Elizabeth II.

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