Weekly Brief: The Fed Has To Bulk Up To Cut Inflation

Weekly Brief: The Fed Has To Bulk Up To Cut Inflation

over 1 year ago3 mins

The Federal Reserve (the Fed) has been taking an increasingly strong stance against resilient inflation, but it’s going to have to really flex its muscles if it wants to see a difference.

🕰 Recap

  • In a bid to curb consumer demand and tame inflation, the Fed delivered its third-straight “jumbo” rate hike of 0.75 percentage points in September
  • But while consumers are showing signs of pulling back, they’re still largely keeping up with rising prices, powered by wage gains and increased borrowing
  • That might explain why US consumer prices rose more than expected last month, prompting traders to fully price in more jumbo Fed hikes at its next meeting

✍️ Connecting The Dots

The Fed has two responsibilities: keep employment full, and hold inflation around a low and stable 2%. Data out last week painted a very rosy picture on the employment front: the US economy added more jobs than expected in September, the unemployment rate unexpectedly fell to a new 50-year low of 3.5%, and wages increased by 5% from the year before. So with the labor market in top form, tamping down the country’s high inflation is the Fed’s top priority.

Problem is, inflation is proving to be stickier than initially thought. That became abundantly clear when Thursday’s inflation report showed consumer prices had increased by a more-than-expected 8.2% last month compared to the same time last year. Month-on-month inflation, meanwhile, came in at 0.4% – double the 0.2% economists were expecting. But here’s where things got really ugly: core consumer prices – which strip out volatile energy and food costs – shot up by a more-than-expected 6.6% from a year ago. That’s quite the acceleration from August’s 6.3%, and marks the highest rate of core inflation in 40 years.

All said, that definitely wasn’t the inflation report the Fed was hoping for, and it’ll likely push the central bank to stick to its most aggressive rate-hiking campaign since the 1980s. That’s only reinforced by minutes from the Fed’s last meeting, released earlier this week, which showed one philosophy reigning supreme: it’s better to do too much rather than too little in the fight against inflation. That might explain why traders are now betting that the Fed will deliver two back-to-back “jumbo” rate hikes of 0.75 percentage points at its final two meetings this year.

🥡 Takeaways

1. Inflation could stay high.

The Fed might be praying for a quick drop in inflation, but there are reasons to expect the opposite. For one, shelter costs – which make up a third of the overall consumer price index – rose 0.7% for a second consecutive month in September, and economists expect them to remain lofty for a while as higher interest rates lead to bigger mortgage payments and rental costs. And for another, geopolitical developments could well send material prices higher again. OPEC+, for example, recently announced a massive cut in oil production. The US government, meanwhile, is considering a ban on Russian aluminum – a key component used in a huge variety of products, from cars to consumer electronics.

2. Ordinary Americans need to borrow more.

High inflation is eroding Americans’ paychecks and forcing many to rely on savings and credit cards to keep up. Consumer debt, including credit cards, rose to an all-time high for 118 million US households – that’s everyone besides the richest 10%. That debt has ballooned by $300 billion over the last year, the biggest annual gain on record. Consumer debt for the top 10%, meanwhile, has remained virtually unchanged over the past year, underscoring how high inflation is widening the wealth divide in the US.

🎯 Also On Our Radar

It might be a bear market for crypto investors, but it’s most definitely a bull market for crypto hackers. According to blockchain analysis firm Chainalysis, at least $718 million worth of crypto has been stolen in hacks so far in October. That brings the year-to-date total to past $3 billion, putting 2022 on course for a record-breaking year in terms of total value hacked.

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