The Fed’s ‘worst nightmare has begun’
Less than a month after the Fed's half-point rate cut, it’s become clear that the decision made “absolutely no sense,” according to The Kobeissi Letter, a financial market commentator.
“The Fed’s worst nightmare has begun,” the publication wrote on social media, referring to the dreaded combination of “rising inflation with rising unemployment.”
Headline inflation cooled in September, but certain categories of consumer prices remained sticky. Food away from home increased by 3.9% annually, while shelter costs were up 4.9% over the past year.
But perhaps the biggest concern was that core inflation—a category that excludes volatile food and energy costs—accelerated to a 3.3% annual rate.
As The Kobeissi Letter explained, September marked the first time that core inflation rose since March 2023. Meanwhile, jobless claims spiked to 258,000 last week, much higher than the 230,000 expected.
The jobless claims data seems to clash with the September nonfarm payrolls report, which showed that employers added 254,000 workers to payrolls during the month—far exceeding expectations.
However, The Kobeissi Letter predicts that the September reading would likely be "revised sharply lower," similar to the previous downward revisions.
Fed’s Bostic: Central bank could skip November rate cut
This nasty combination of sticky inflation and rising unemployment already has the Fed second-guessing what to do next.
On the same day as the inflation data were released, Atlanta Fed Bank President Raphael Bostic said he had yet to decide on a November rate cut. “I am totally comfortable with skipping a meeting if the data suggests that’s appropriate,” Bostic said in an interview.
Responding to the latest inflation figures, Bostic said, “This choppiness to me is along the lines of maybe we should take a pause in November.”
Bostic is a member of this year’s Federal Open Market Committee (FOMC), which sets interest rates. His comments are already resonating with investors and skewing expectations about what the central bank might do next.
One week ago, markets said there was a more than 97% chance that the Fed would cut rates again in November, based on CME Group’s FedWatch Tool. But after Thursday, the probability had fallen to around 83%.
But are the Fed's rate cuts the only reason behind sticky inflation? Blackrock begs to disagree.
Earlier this month, BlackRock’s strategists warned that the inflation battle is far from over, saying “inflation could surprise the Fed again as it did earlier in the year.”
Unfortunately, some inflation drivers are beyond the Fed's immediate control, according to BlackRock. “Deficits are one reason we see inflation staying above pre-pandemic levels,” BlackRock wrote in a note.
The U.S. federal deficit reached $1.9 trillion for fiscal year 2024. According to the Congressional Budget Office, it could reach $2.6 trillion by 2034.
More from Creditnews:
- Only 2.5% of U.S. homes changed hands this year, Redfin says
- Lower rates will only improve housing affordability for 3-6 months, experts say
- Fed’s Kashkari sees no signs of ‘resurgent inflation’
- ‘We are in a recession already,’ financial veteran says
- Inflation will remain ‘sticky’ and ‘surprise the Fed again,’ BlackRock strategists warn