It Really is a 'Challenging Situation'
- cornerstoneams
- 19 minutes ago
- 5 min read
"In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate."
In a recent edition we focused on the Federal Reserve’s dual mandate, which charges them with addressing price inflation and the general employment market.
To underline this, we shared the above header quote, which was excerpted from Chairman Powell’s speech at Jackson Hole back in August. We share the above excerpt again because recent data on both fronts of the dual mandate offer increased concerns.
As of this writing, the Fed has yet to release their updated policy on interest rates, but all know a cut is assured. The larger question is, will the economic backdrop deteriorate on a trend basis, resulting in the need for numerous rate cuts?
History offers large and numerous cuts signal notable economic issues. Notable economic issues then speak to serious job losses, and in markets, notable downward price action, in particular for the stock market. If you are cheering for notable interest rate cuts, you may want to reconsider that view.
In particular with our current backdrop as viewed through the lens of the Fed’s dual mandate. That is, through the lens of price inflation and the employment market.
Price inflation, as underlined via last week’s update, is not cooperating. The employment market, as of an additional update last week, is also not cooperating.
While the lack of cooperation from the price inflation front is not new news, the developing weakening employment landscape, on a developing trend basis, is relatively new. If these storylines continue, they will walk us further and further toward a stagflation backdrop.
As we offered in a recent edition, think of it more as stagflation-light, whereby economic growth is not too weak but is noticeably on the weaker side, while price inflation is not running hot, and yet, is also noticeably too high. Weaker growth + higher price inflation = stagflation on the lighter side.
If current developing trends continue relative to the Fed’s dual mandate, the above scenario will become more obvious to the citizenry.
Okay, that Claims Data is Different
Back in late August when we originally shared today’s header quote from Chairman Powell, we included some unemployment claims data. Our traditional go-to for unemployment insurance is the Initial Weekly Unemployment Insurance Claims data.
We look at the initial claims data as a notable piece within the employment landscape in that it can be viewed as a canary in the coal mine. In our late August edition, we offered a different view whereby we shared the Continued Claims data.
We noted how those claims were offering a continual increase of late, which in itself showed people were having difficulty in finding follow-on employment after having been laid off. This corroborated other measures offered within that edition.
We also shared within that late August edition, to that point in time, the initial claims data continued to remain within its recent well-contained range. This offered that those employed were not experiencing employment risk/stress en masse.
Then we received the most recent update late last week, which offered a change in behavior. Importantly, one week certainly does not make a trend, but we are quite vigilant on the employment landscape, so the change certainly caught our attention.
The above is a one-year chart for Initial Claims for unemployment insurance.
Our red arrow denotes the tremendous increase of these claims to a new high level in the previous twelve months.
Additionally, this level of initial claims is the highest we have seen since the fall season of 2021, when, at that time, the trend was down as the employment market continued to regain its footing from the Covid-induced recession.
We are now embarking on an attempt at trending upward, with the above one-year chart reflecting a break to a new high level, which again, also walks us all the way back to 2021 levels.
If this storyline develops into an upward trend, then the risk of an inbound recession increases notably. Hence, our vigilance in watching the claims data.
Consumer Prices
Late last week we also received an update on consumer prices via the Consumer Price Index (CPI) and its universe of subcomponents.
No matter how you sliced the data, it simply offered an ongoing price inflation issue. In a larger sense it certainly is not red hot, such as we experienced some time ago, and yet, it continues to remain sticky and stubborn at elevated levels.
Above is a 10-year chart of CPI in order to offer some perspective.
Our red horizontal line denotes the well-advertised 2% price inflation target the Fed has opined about for many years now. We still have yet to even touch that target level in this price inflation era. Said differently, price inflation is not dead.
Instead of focusing on the 2% level, the 3% level is more applicable in that the most recent release came in at 2.9% year-over-year. Our red arrow highlights the new trend attempt of recent months.
Adding to this troubling data, the month-over-month data came in at .4%. This is the highest one-month increase since January of this year.
A similar storyline is told by the Core CPI price inflation reading, which is not shown.
The core extracts out food and energy in light of their more volatile pricing behavior. Core CPI came in at 3.1% year-over-year.
We have shared on this reading many times and have noted how it has remained stubbornly attached to the general 3% growth level. For perspective, in January it was 3.3% year-over-year. Our current reading of 3.1% underlines its stubbornness.
For further perspective, in the spring season of this year, we saw a couple of readings posting 2.8% year-over-year. Putting it all together, the data shows price inflation is not over, and yet, the Fed continues to push their 2% inflation target commentary with each passing meeting.
For our part, we have offered ad nauseam during this price inflation era that history offers; once steeped in a price inflation era, it does not end without a recession entering the socioeconomic landscape. Thus far at least, history continues to be proven correct.
Time will tell her story as to whether a recession plays a role in taking out this price inflation era, which dates back to early 2021. Yes, early 2021. Remember, way back then, the newfound price inflation issue at that time was assuredly a “transitory issue.”
As it stands, we are focused on the stagflation-light scenario.
Cutting rates is not exactly the protocol for tightening financial conditions in order to crimp price inflation, and yet, in light of the Fed’s dual mandate whereby the employment landscape is softening, rate cuts will occur.
For those thinking rate cuts will surely bring with them economic nirvana, or some close kin to such an economic landscape, don’t forget price inflation has proven itself to be quite stubborn.
As long as price inflation is lurking, rate cuts run the risk of stoking it further, which, if it occurs, will be a notable issue in the socioeconomic landscape.
I wish you well…
Ken Reinhart
Director, Market Research & Portfolio Analysis
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