Nobel Prize-winning economist Robert Shiller warns that rising interest rates very well could hinder the housing market.
The Yale economics professor also warns that savvy investors must keep an eye on roaring inflation.
“Obviously interest rates… it’s the price of time. It’s a fundamental factor in our economy. And people watch it. A lot of people think the stock market is overpriced, but what’s the alternative?” Shiller told Fox Business Network.
“If you go into debt, it has not been a very good return either. But that’s all changing now and maybe that’s the new narrative,” said Shiller, who was awarded the Nobel Prize in Economic Sciences with Eugene Fama and Lars Peter Hansen in 2013.
The recent retreat in equities had been long awaited by investors as the market climbed steadily to record high after record high with few bumps.
Homebuyers also have gotten used to a no-inflation environment, said Shiller, who also helped develop the widely-followed S&P/Case-Shiller Home Price Indices.
The Federal Reserve has forecast three rate rises this year and investors widely expect the central bank to lift borrowing costs again when it meets on March 20-21.
According to the latest employment report, wage growth rose 2.9% compared to the same period a year earlier. Investors fear the Federal Reserve might raise interest rates faster than anticipated due to stronger-than-expected wage growth data, Fox Business Network explained.
Shiller said he didn't find the latest data “alarming.”
“That’s not necessarily inflationary,” said Shiller, who developed the cyclically adjusted price-earnings (CAPE) ratio market valuation measure, which is calculated using price divided by the index's average historical 10-year earnings, adjusted for inflation.
“But if the economy stays full tilt as it has been, a pickup of inflation would not be a surprise and some people wouldn’t mind it so much.”
For his part, New York Federal Reserve President William Dudley said on Thursday that as long as the U.S. economy continue to grow at an above trend pace, he would be in favor of another interest rate rise at the U.S. central bank’s upcoming meeting in March.
“We have above-trend growth, we have buoyant financial conditions, we still have an easy monetary policy and this is all taking place with a very large tax cut that’s going to provide additional stimulus,” Dudley said in an interview with Bloomberg TV when asked what it would take for him to support a rate rise at the Fed’s next policy meeting.
“As long as I am comfortable the economy continues to grow at an above-trend pace ... I‘m probably going to be supportive of removing monetary policy accommodation,” he said.
Dudley also played down the impact of the recent stock market sell-off on the U.S. economic outlook, saying that so far the declines were “small potatoes” compared to the rise in equity valuations over the past few years, Reuters explained.
Dudley said the forecast of three rate hikes still seemed a “very reasonable projection” but added there was a potential for more.
“If the economy looks stronger as we go through the year, could that three turn out to be more? Perhaps,” he said.
The sharp selloff in recent days was kicked off by concerns over rising inflation and bond yields, sparked by Friday’s January U.S. jobs report, with investors pointing to additional pressure from the violent unwind of trades linked to bets on volatility staying low, Reuters explained.
(Newsmax wire services contributed to this report).
© 2024 Newsmax Finance. All rights reserved.