Is the Fed Going Too Far?

A respected measure of inflation in the United States is expected to tick higher in September even as the Federal Reserve moves to fight rising prices at its most aggressive pace in decades. Wall Street is worried that yet another high reading on the Consumer Price Index will prompt another massive interest rate increase and inflict more pain on markets and the US economy.

On Thursday, the Bureau of Labor Statistics will release the Consumer Price Index, which measures a basket of goods and services, for September. Investors are concerned that a data-driven Federal Reserve will likely view elevated numbers as a mandate to continue on with aggressive interest rate hikes, increasing the odds of a painful recession in the United States.

But this full-steam-ahead approach by the Fed, based on the notion that iron-clad data is protection enough, has given some economists pause. Greg Mankiw, a Harvard University economist, and former chair of the Council of Economic Advisers in the George W. Bush administration, joined a group of bipartisan economists this month to argue that the Fed is “braking too hard.”

Monetary policy impacts the economy with a lag, as the Fed has noted in the minutes of its meetings. There’s a possibility, some economists argue, that the Fed has already brought inflation down and the delay in that showing up in the numbers is causing the central bank to overcorrect, propelling the economy into an unnecessary downturn.

Food commodity prices have come down from their spring peaks, and wholesale used car prices have fallen. Crude oil prices, even with last week’s OPEC+ production cuts, are still well below their summer highs. Last week’s nonfarm payroll report roiled markets, but job openings have now fallen by 1.8 million since their March peak. That’s the biggest decline ever outside of a recession, according to Goldman Sachs analysts.

Core CPI – a metric closely watched by the Fed because it strips out volatile food and energy prices – will be slow to reflect these changes. That’s because shelter prices account for over 40% of the number, wrote Jan Hatzius, Goldman Sachs’ chief economist. Rent and housing prices are showing signs of softening, he wrote, but they’ll take a year to fully show up.

CPI is just one of many data points the Federal Reserve considers, and Fed chair Jerome Powell has said that the central bank looks at multiple months of data, not just one report. Still, if markets even as much as perceive an overcorrection, more volatility lies ahead.