Amidst the relentless battle against soaring inflation, experts are casting doubt on the Federal Reserve’s effectiveness. The latest job report and inflation data paint a bleak picture of the central bank’s ability to achieve its target of 2% inflation.
Peter Schiff, Chief Economist at Euro Pacific Asset Management, expressed his concerns, stating that the Federal Reserve is “not making any progress in its inflation fight.” Despite their efforts to curb inflation through interest rate hikes, consumers continue to spend and deplete their savings, exacerbating the problem.
The recent data from the Personal Consumption Expenditures (PCE) index is particularly worrisome. It revealed a 0.2% increase in consumer prices from the previous month and a substantial 3.3% annual surge. Core prices, which exclude food and energy, climbed by 0.2% monthly and 4.2% annually, underscoring the challenge of reining in high inflation.
Consumer spending also showed resilience, with a 0.8% jump in July compared to a 0.6% increase in June. However, this was met with a meager gain in incomes, leading to a sharp decline in the savings rate to 3.5%. Schiff noted that this drop in savings is a sign of economic weakness, as consumers struggle to maintain financial security in the face of rising prices.
In addition to the concerning PCE index, the Labor Department’s August job report was released, revealing moderate job growth of 187,000 positions, surpassing forecasts. However, the unemployment rate unexpectedly increased from 3.5% to 3.8%, signaling a potential cooling in the labor market due to rising interest rates and persistent inflation.
Average hourly earnings, a key measure of inflation, rose by only 0.2% for the month, remaining at 4.3% year-on-year. While these figures were below estimates, they were seen as a welcome sign by the Federal Reserve, which is grappling with the challenge of taming rising prices.
Furthermore, the job report included significant downward revisions to job growth for June and July, suggesting a weaker labor market than previously thought. Schiff highlighted that this pattern of downward revisions has persisted throughout the year, indicating potential bias in the Labor Department’s assumptions about market strength.
Schiff warned that this situation is indicative of stagflation, characterized by a weakening economy and labor market alongside strengthening consumer prices. Despite the Federal Reserve’s aggressive rate hike campaign, they remain far from their 2% inflation target.
The slowdown in hiring, coupled with rising unemployment and stagnant wage growth, may prompt the Federal Reserve to pause its rate-hike campaign in September, and possibly extend it to November. However, Schiff argued that the proper response from the Fed should involve both rate hikes and significant spending cuts.
Schiff’s assessment of the situation is grim. He believes that while the Fed may announce additional rate hikes, they are unlikely to make a substantial difference. Higher interest rates, he argues, are needed to combat inflation effectively, but the economy cannot withstand them without facing a financial crisis on a scale potentially worse than the 2008 recession.
In conclusion, the Federal Reserve’s battle against inflation appears to be an uphill struggle, as economic indicators and expert opinions raise questions about the efficacy of their current approach. The path ahead remains uncertain, with the central bank faced with tough decisions in its quest to achieve economic stability.
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