- Economist David Rosenberg warned that the Federal Reserve is too focused on inflation data.
- Investors expect another 75-basis-point rate hike later this month after August's inflation report.
- But Rosenberg urged the Fed to pause its hiking program as the US economy is "flat on its back."
David Rosenberg has warned that the Federal Reserve risks punishing longer-term investors by focusing on monthly inflation prints instead of the growing prospect of a recession.
The chief economist of Rosenberg Research said in a recent interview that he expects the US central bank to hike interest rates by 75 basis points when it meets later this month. However, he called on the Fed to temporarily pause its hiking program as the US economy is already under pressure.
"I'd be pausing right now and assessing the tightening that's already been put into the system," Rosenberg told CNBC on Wednesday. "We're talking incessantly about inflation, but the economy is flat on its back right now."
"Inflation's a lagging indicator but this Fed is bent on contemporaneous or lagging indicators, and 75 basis points is baked in the cake," he added.
Tuesday's Consumer Price Index report showed prices rising year-on-year at a rate of 8.3%, 0.2 percentage points faster than economists' expectations.
The inflation surprise triggered a major sell-off in stocks and bonds, with the Dow Jones Industrial Average shedding nearly 1,300 points in a day, and US 10-year Treasury yields spiking by nearly 15 basis points in a single trading session.
The Fed's current hiking program will punish longer-term bondholders whose fixed-income holdings are especially sensitive to changing interest rates, Rosenberg said.
"The Fed continues to take the carry away and they continue to penalize investors for taking on duration risk," he said.
Rosenberg added that he only expects the US economy to come out of a Fed-driven recession once it's experiencing a period of deflation, which would allow policymakers to start advocating interest-rate cuts. In 2009, inflation rates in developed economies turned negative in the aftermath of the financial crisis.
"We're going to have a recession — we can argue whether it'll be deep or mild, but the question is what ends up getting us out of it," Rosenberg said. "I think what happens, as an economist, is the supply and demand curves start to intersect the other way — and we go back into a deflationary period like we did in 2009."