Fed’s nightmare arrives: weak jobs, high inflation
The Federal Reserve’s worst-case scenario may be unfolding after a sharply weaker-than-expected US jobs report landed just days after inflation accelerated above 4%, says the CEO of global financial advisory giant deVere Group.
The comments from Nigel Green come after the US economy added just 57,000 jobs in June, far below expectations, while April and May payrolls were revised sharply lower.
The unemployment rate edged down to 4.2%, but average monthly job growth over the past year has slowed to just 36,000.
The figures come less than a week after the Federal Reserve’s preferred inflation measure rose to 4.1%, more than double the central bank’s 2% target.
Nigel Green says: “This is the scenario the Federal Reserve was hoping to avoid.
“It’s a nightmare scenario. The economy is slowing, but inflation remains above 4%. That leaves policymakers trapped between two problems and without an easy solution.”
He continues: “At the beginning of this year, markets were debating how many times the Fed would cut interest rates.
“Now, investors are asking a very different question: can the Federal Reserve cut at all if inflation remains this elevated?”
The June employment report points to a labour market that is losing momentum more quickly than many investors anticipated. Hiring slowed sharply, previous gains were revised lower and several sectors showed little or no growth.
Yet inflation remains stubbornly high.
“This jobs report creates more uncertainty.
“For the past two years, investors have operated on the theory that weaker economic data would automatically lead to lower interest rates.
“Today’s report suggests that relationship may no longer be so straightforward.”
He argues that investors have repeatedly underestimated the complexity of the current economic cycle.
“Again and again, markets predicted recession. Again and again, they predicted rapidly falling inflation and aggressive monetary easing.
“Instead, we have a slowing economy alongside inflation that remains deeply uncomfortable for policymakers.
“That’s not a normal economic environment.”
The CEO of deVere Group says the implications go way beyond monetary policy.
“The assumption that lower interest rates would quickly return has influenced investment strategies, business planning and asset valuations across the global economy.
“Those strategies now deserve a serious reassessment.”
He notes that while financial markets are likely to increase expectations of future rate cuts following today’s report, Federal Reserve officials are unlikely to focus on employment data alone.
“Central bankers understand that credibility matters. They know that declaring victory over inflation too early risks creating a much bigger problem later. This means the Federal Reserve now faces one of its most difficult balancing acts in years.”
Nigel Green concludes: “The Fed’s nightmare scenario is an economy losing momentum while inflation remains stubbornly high.
“And until one of those forces gives way, uncertainty is likely to remain the defining feature of the economic and investment landscape.”