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Stocks freak out as inflation proves one thing: 'The Fed has the worst problem in the world' and a recession is the only solution

Stocks tumbled on Tuesday on fears that the Federal Reserve will eventually trigger a recession after higher-than-expected inflation data, spreading like wildfire.

The Federal Reserve has raised rates four times this year in an attempt to cool rising consumer prices, with Fed Chairman Jerome Powell saying his inflation fight is “unconditional” and that rate hikes will continue, even if it hurts Americans It means some “pain”. But data from the U.S. Bureau of Labor Statistics on Tuesday showed that despite Powell’s efforts, inflation, as measured by the consumer price index (CPI), rose 0.1% in August, up from a year earlier up 8.3%.

The Dow Jones Industrial Average fell more than 830 points (or 2.58%) to 31,546 following the release of the inflation data, as experts soon sounded the alarm about a rising possibility of a Fed-induced recession. “The Fed has the worst problem in the world,” Chris Zaccarelli, chief investment officer at the Alliance of Independent Advisors, told FORTUNE , arguing that the central bank will be forced to continue A rate hike would shrink its balance sheet even as the economy slows, which would lead to a marked increase in unemployment. “This is a political issue, not an economic one – the only solution to the current crisis is a politically infeasible one,” he said. “If the Fed thinks they’ve been criticized too much by the previous administration (and they are), wait until they see the type of criticism they’re going to receive because they’ve purposely created an economic scenario where unemployment is going to go up dramatically. Zaccarelli Listen Worried about what’s coming next: “Not only will they end up leading to a recession, but it’s going to be a bad recession. Nor is he the only economic pundit to warn Americans of the “pain” from the coming Fed. Sinem Buber, chief economist at ZipRecruiter, told Fortune , the rise in core inflation in August excluding volatile food and energy prices was a worrying sign. “Real action in the report – Fed focus and most relevant to future inflation A synonymous number – is core inflation. That’s a staggering 0.6% increase in August and 6.3% for the year,” she said. “It suggests that the Fed may have to keep rates higher for longer to keep inflation in check, which would have implications for the housing and labor markets. greater pain. ” EY Parthenon chief economist Gregory Daco said a rise in core inflation, in particular, could give the Fed’s “soft landing” goal of keeping inflation under control The goal of not triggering a recession — is out of reach. “Inflation remains broad-based, with continued momentum in core CPI suggesting that inflation dynamics will only moderate very slowly,” Daco told Fortune. “Higher and longer-lasting inflationary pressures increase the risk of a hard landing against the backdrop of a global central bank tightening cycle. ” And for investors, high inflation data means stocks will continue to come under pressure as rising interest rates increase borrowing costs and lower market valuations. Cliff Hodge, Chief Investment Officer at Cornerstone Wealth, told Fortune “Unfortunately for markets, this report will reinforce the need for the Fed to remain aggressive and potentially limit risk assets for the foreseeable future. .

The Best Bad Guys

Of course, the latest CPI report isn’t all bad. As gasoline prices drop each month 10.6%, and overall energy prices fell 5% in August. After surging throughout the pandemic, used car prices also fell 0.1% last month. Overall, however, the latest inflation report was not a Wall Street story. Hopeful. The category that makes up about 70% of the consumer price index saw annual price increases of more than 4% in August. Although natural gas prices have fallen sharply since June, experts say energy price relief may not last. Jeffrey Roach, chief economist at LPL Financial, told Fortune he is concerned that rising electricity and natural gas prices this winter will eventually wipe out the U.S. Most of the savings people have made from the recent drop in natural gas prices. Week. Roach also sees rising food costs as an “increasing concern”. Food prices rose 11.4% year-on-year in August, which is The largest year-over-year increase since 1979. “Inflationary pressures have particularly hurt low-income households, who spend most of their income on food,” Roach noted. While higher grocery store prices have hurt economics Homes are worried, but their main concern appears to be housing inflation. Overall housing prices rose 0.7% in August and were up 6.2% year-over-year. While this may not seem like much, it’s an important statistic because housing Prices make up more than 32% of the CPI, of which about 8% is rental prices and about 24% is owner-equivalent rent (OER) – this is determined by a monthly survey that asks consumers who own primary residences How much rent they are willing to pay to own their own home. Liz Ann Sonders, chief investment strategist at Charles Schwab, noted in a tweet on Tuesday that the OER portion of the August CPI reading showed a 6.3% year-over-year increase. This is since 1986. Fastest growth since April. Chief Information Officer Jay Hatfield said: “The housing sector is critical as it accounts for nearly one-third of the total CPI and is likely to be an ongoing contributor to inflation , as rents are sticky and slow to be reflected in the CPI through surveys reporting significant lags. “Infrastructure Capital Advisors, told Fortune. However, Hatfield believes that the Fed’s policy of raising interest rates and shrinking its balance sheet, thereby reducing the money supply, will eventually lead to Helps to keep inflation in check. “We continue to be optimistic that inflation will steadily decline over the next 6 months, as a 15% reduction in the money supply by the Fed generates a very strong dollar and increases mortgage rates by substantially raising mortgage rates. Slow down the real estate sector,” Hatfield said. Bank of America economists, led by chief U.S. economist Michael Gapen, are not optimistic about the timing, arguing in a research note on Tuesday that true price stability It won’t come until 2024. And, like most of its peers, the Bank of America team is concerned about the growing likelihood of a “hard landing” for the U.S. economy. “In general, core CPI and core commodities are The solid readings for prices suggest underlying price pressures remain firm, which in our view suggests the Fed’s work is just getting started,” they wrote. Increased risk of landing. ”

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