The Fed’s Plan is Falling Apart!

It wasn’t supposed to be like this. Inflation is supposed to be at 2% by now, and jobs should be plentiful in America, yet the latest data reveals growing cracks in the foundation. Why is the Federal Reserve’s election year plan failing miserably?

Part of the problem is that the government has the ability to manipulate the data in its favor. They can use employment figures that don’t count many jobless Americans as technically being unemployed.

They can also use “core” inflation numbers that exclude price increases for important products and services. Additionally, they can publish overly optimistic figures at first and then downward revise them later.

These are old tricks that still work because the current government has mainstream media friends who will always support their narrative. That could change in November, but for now, investors must always be on the lookout for fake news and biased press coverage.

Even with the media bias and outright fabrications, the truth sometimes gets leaked anyway. For example, the inflation data for September wasn’t exactly what the government and Federal Reserve wanted.

The Consumer Price Index (CPI) increased 2.4% year-over-year in September, and that’s not the 2% inflation growth rate the Fed is looking for. It’s also above the 2.3% CPI print that economists had expected for September.

Moreover, September’s CPI increased 0.2% month-over-month versus the 0.1% growth that economists had anticipated. Plus, core CPI rose to 3.3% while marking the first core CPI increase since March of 2023. These “inconvenient” stats are undoubtedly quite frustrating for the Federal Reserve.

Along with all of that, the Producer Price Index (PPI) rose to 1.8% in September, which is above the economists’ estimate of 1.6%. Plus, core PPI inflation increased to 2.8%, which is higher than the economists’ estimate of 2.7%. Thus, both core CPI and core PPI are officially on the rise.

Why is this so frustrating for central bankers? Bear in mind that the Fed enacted a “jumbo” 50-basis-point interest rate cut in September. However, if the Fed can’t keep inflation under control then the “jumbo” rate cut could turn out to be a huge mistake.

It’s going to be awfully hard for the Federal Reserve to manage inflation in the wake of two major hurricanes and the dockworkers’ strikes. Those are temporary events, but they’ll have inflationary impacts that could last for a while.

Then there’s the jobs data, which also isn’t doing what the central bankers want it to do. For the week that ended on October 5, initial jobless claims (the number of Americans who applied for unemployment benefits) unexpectedly jumped by 33,000 to 258,000.

That’s the highest level of U.S. initial jobless claims since August of 2023. Furthermore, economists had only expected new unemployment claims to increase by 5,000 to 230,000.

The Fed is between a rock and a hard place. Cutting interest rates aggressively in November and December could lead to a huge spike in the inflation rate. On the other hand, the aforementioned jobs data indicates that the economy is fragile, and low interest rates may be necessary to prevent a total collapse.

Don’t feel too sorry for the Federal Reserve, though. It’s a long-running series of policy errors and a drastic overreaction to the COVID-19 pandemic that got them in this dilemma in the first place.

Experts are also coming to the conclusion that the Fed’s “jumbo” rate cut from September was a policy mistake. Eric Wallerstein, chief markets strategist with Yardeni Research, acknowledged that the 50-basis-point interest rate cut “was certainly premature.”

What should investors expect now? The Federal Reserve will likely tread carefully in November cutting interest rates by 25 basis points instead of 50.

However, new developments will create a hazy and challenging outlook for the Fed and other policymakers in November. Quoting EY Chief Economist Gregory Daco, “We anticipate a 25 bps rate cut in November but stress that the economic picture will be muddied by recent hurricanes, strikes, and Election Day two days before the FOMC meeting.”

Thankfully, none of this requires investors to abandon their portfolio diversification strategies right now. Whether you own gold, silver, Bitcoin, or a combination of these, it’s essential to hedge against further policy errors and the ongoing damage done by the Fed’s many errors of the past.