The last economist to say the Fed wouldn't hike rates still thinks they shouldn't

Janet yellenMark Wilson/Getty ImagesFederal Reserve Chairman Janet Yellen

The world expects the Federal Reserve to begin hiking interest rates on Wednesday.

At 2pm ET, the Fed’s Federal Open Market Committee will announce its decision on rates and monetary policy. Should they officially announce a rate hike, it would be the first such move since June 2006. Notably, the Fed would be lifting rates from near-0% for the first time since December 2008.

But Lindsey Piegza, the market economist at a major firm to think the Fed would not hike rates, believes the Fed should not do it.

Piegza, chief economist at Stifel, long remained adamant that the Fed would focus on what she called “relative weakness of the economy” and not raise rates. As of last Thursday, her official call according to Bloomberg’s survey of economists was still for the Fed to remain on hold.

When reached by Business Insider on Friday, however, Piegza said that she had switched her call and believed the Fed would raise rates. This decision, however, would come as the central bank gave into outside pressure and would prove, ultimately, to be a huge mistake.

Talking their way into a corner

The origin of the Fed’s errors, said Piegza, were comments made by Yellen in July 2015. In a speech, Yellen said she expected economic conditions to support a hike “later this this year.” Since then the increasing pressure and a refusal to spook markets by switching course has pushed Yellen into a corner.

“The Fed really did this to themselves. They don’t have good enough economic data, but they have set up expectations for a hike by saying that it will happen this year,” Piegza told Business Insider.

“Bernanke would have never used this kind of language. Greenspan would have never used this kind of language. A more seasoned chairman would never have put their foot in their mouth.”

Piegza thinks that when asked a timeframe for the rate hike Yellen could have had a much better response.

“A chairman with more practice would have sidestepped the question and never taken a strong position on the timing,” said Piegza.

This mistake was combined with Yellen’s “doubling down” on the idea, giving in to the market and investors who are now “hammering down” on her to fulfil expectations.

Yellen will come to the meeting ready to hike, said Piegza. Eventually she will convince some of the FOMC’s more “on-the-fence” members to join her by promising an incredibly slow rate of hiking.

The economy isn’t ready

The bigger issue, Piegza told Business Insider, is that economic data does not support an interest-rate hike. Chief among her concerns was that inflation is too low.

“Everyone, including the Fed, can agree that inflation is not meeting the stated goal of 2%,” Piegza said.

“No matter what measure you use, it’s just not there.”

SP 500 2015 Support Resistance Levels 2000Andy Kiersz/FREDWhile not Core PCE, the Fed’s favourite measure, regular PCE also shows the low inflation in the US.

The second part of the Fed’s mandate, full employment, hasn’t been reached either said Piegza.

“If [the economy] was at full employment, there would be much more upward pressure on wages,” Piegza said. “You just don’t see that.”

Piegza’s argument is simply that if the pool of workers had really dried up enough to say the US was at full employment, businesses would have to raise wages to attract workers. So far, hourly wages have stayed around 2%, which Piegza said is not nearly enough to indicate the mandate has been met.

Piegza even pointed to Yellen’s own words.

“Just look at Janet Yellen, she said just last week that the labour market is not yet at full employment,” she said, quoting a December 2 speech from Yellen at the Economic Club of Washington, D.C.

But ultimately Piegza thinks Yellen will give in to external pressure and expectations that expect a rate hike on Wednesday.

“Do I think it is the right policy move? No. Do I think that data is there? No. But do I think we will see a 25 basis point increase move based on the Fed giving in to market expectations and the schedule is set.”

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