Macroeconomist Adam Kobeissi stated that the risks facing the Fed are increasing, and that the current economic outlook resembles “the Fed’s worst nightmare.”
According to Kobeissi, one of the most significant limitations of the Fed is that it can only control inflation from the demand side, and cannot directly intervene in supply-side shocks.
The analyst noted that the sharp rise in energy prices, in particular, has created supply-driven inflationary pressure, and that in such situations, the Fed is forced to take more aggressive steps to suppress demand. Recalling that the opposite happened during the 2020 pandemic, Kobeissi stated that interest rates were lowered to zero due to a collapse in demand, but today, with rising energy prices, a completely different picture has emerged.
According to Kobeissi’s models, rising oil and natural gas prices could push US consumer inflation (CPI) to 3.5%, approximately 150 basis points above the Fed’s long-term target. While theoretically this would necessitate tighter monetary policy and interest rate hikes, the analyst noted that current macroeconomic conditions make this step difficult.
Kobeissi added that the weakness in the labor market has become particularly pronounced, stating that despite recent monetary easing, there has been no significant improvement in employment. Therefore, he warned that if the Fed raises interest rates, the US economy could face a serious unemployment crisis.
On the other hand, Kobeissi stated that if the Fed does not tighten monetary policy, inflation could rise above 4%, adding that this depends particularly on the duration of geopolitical risks centered on Iran. In this context, the analyst stated that the Fed is faced with two difficult options, saying that one of the scenarios – either inflation above 3.5% or unemployment above 5% – may be inevitable.
*This is not investment advice.