The Fed’s latest commentary, better known as the Beige Book, revealed striking contradictions in the U.S. economy, creating what economist Mohamed El-Erian calls an exceptionally difficult environment for monetary policy.
While many observers focused on the Beige Book’s description of overall economic activity as “largely stable” compared with the previous report in early September, El-Erian warned that the underlying details point to something more troubling: the risk of stagflation. Although he didn’t use the term explicitly, his commentary strongly implied it.
“Today’s Beige Book highlights the policy challenge facing this highly data-dependent Federal Reserve,” El-Erian wrote.
According to the report, many companies are cutting staff through layoffs and attrition, which hints at a cooling labor market.
At the same time, input costs are rising more rapidly across several Fed districts, suggesting that businesses may soon pass those higher costs on to consumers. That comes as the Consumer Price Index (CPI) has continued to climb in recent months.
“The backward-looking numbers that this Fed has been using and citing as its main policy influencer do not give a green light for more rate cuts,” El-Erian said.
Unlike some analysts who argue the Fed has lost credibility in its inflation fight, El-Erian doesn’t believe policymakers should halt rate cuts altogether.
Instead, he urged the central bank to incorporate “forward-looking, strategic judgment” into its decision-making, something he says has been lacking under Chair Jerome Powell’s leadership.
Without this judgment, the central bank may face even greater scrutiny in navigating expected rate cuts in the coming months.
Powell, Fed double down on rate cuts
Powell signaled on Wednesday that further interest rate cuts are likely, saying a weakening labor market justifies additional easing.
Powell also sought to reassure skeptics, noting that apart from the effects of tariffs, there are few signs of broad-based inflationary pressure in the economy.
Fed Governor Stephen Miran reinforced that message on Thursday, arguing that escalating trade tensions with China strengthen the case for faster rate reductions.
Miran said the Fed’s quarter-point rate cut in September should be followed by an additional 1.25 percentage points in cuts. His comments carry added weight as he is a voting member of this year’s Federal Open Market Committee (FOMC).
Financial markets appear to agree. Futures prices tracked by CME Group’s FedWatch tool show traders are nearly certain the Fed will cut rates again in October and December, with the odds of a further reduction in January roughly a coin toss.
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