The Fed 'moved too fast' with rate cuts and now risks reigniting inflation, analyst says

• The Fed's decision to lower interest rates by a half-point comes in response to labor-market weakness.
• But the aggressive cut risks igniting inflation, a Richard Bernstein analyst said.
• One professor said that the Fed's cut has set a new expectation for future easing.

While the Federal Reserve's half-point interest-rate cut has catapulted stocks to record highs, the decision to go big has earned mixed reviews among some economists.

On the positive side, Wharton professor Jeremy Siegel called the decision the "best news" the Fed has offered in years. He previously warned that a smaller 25-basis-point cut risks a labor-driven recession.

But Michael Contopoulos, director of fixed income at Richard Bernstein Advisors, is less convinced such an aggressive move was warranted. He said the Fed "moved too fast" with its 50-point cut.

Contopoulos cited that long-term bond yields have risen since the Fed's announcement. This is unusual, since investors will typically snap up these assets after a rate cut. Lower borrowing costs make fixed-income less attractive the longer they wait.

And yet, higher yields suggest that investors are staying out of the market. That signals expectations that inflation could rise again, caused by the Fed's overeagerness to loosen rates.

"Because the long-end went up, it was more of a reflection of the bond markets pricing in higher future growth and inflation — essentially saying that maybe Powell is stepping into, admittedly, a very small mistake by easing financial conditions, easing monetary policy, thereby accelerating potential long-term growth and inflation," Contopoulos told CNBC.

Some on Wall Street noted that the Fed's decision to cut beyond 25 basis points was essentially a signal that the central bank is moving past inflation. To Contopoulos point, this may be premature, as August's consumer price index report still stood above the 2% inflation target.

University of Rochester professor Narayana Kocherlakota agreed that inflation remains sticky enough to cut rates slowly. In his view, labor data was not weak enough to justify the bigger cut — but by doing so, the Fed is now stuck with bigger rate cuts, he said on CNBC.

"I think they're going to be forced to do 50," he said, adding: "I think that markets are going to be forcing them to move faster through their expectations."