AP: Rising Inflation & Deteriorating Job Market Puts the Fed in a Difficult Spot
The following is an excerpt from an article that appeared on The Associated Press website.
Inflation rose last month as the price of gas, groceries and airfares jumped while new data showed applications for unemployment aid soared, putting the Federal Reserve in an increasingly tough spot as it prepares to cut rates at its meeting next week despite persistent price pressures.
Consumer prices increased 2.9% in August from a year earlier, the Labor Department said Thursday, up from 2.7% the previous month and the biggest jump since January. Excluding the volatile food and energy categories, core prices rose 3.1%, the same as in July. Both figures are above the Federal Reserve’s 2% target.
A separate government report Thursday showed that weekly applications for unemployment aid jumped 27,000 to 263,000, the highest in nearly four years. Requests for jobless benefits are a proxy for layoffs. Recent reports have also showed that hiring has weakened dramatically this year and was lower than previously estimated last year.
Such a scenario could create major headaches for the Fed as it prepares for a meeting next week, when policymakers are widely expected to cut their short-term rate to about 4.1% from 4.3%. The Fed is under relentless pressure from President Donald Trump to cut rates. At the same time, stubborn inflation while the job market is weakening is difficult for the central bank because they are diverging trends that require polar reactions from Fed policymakers to address.
Typically the Fed would cut its key rate when unemployment rises to spur more spending and growth. Yet it would do the opposite and raise rates — or at least keep them unchanged — in the face of rising inflation.
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