US News

Analysis: The Fed has few options as inflation runs hot

Guh. That’s the sound I made this morning as I rolled into work and glanced down at the news alerts on my phone all screaming the same depressing figure: 9.1%. Consumer prices rose 9.1% in June — that’s much higher than the 8.8% economists had forecast, and it means our year-plus tussle with inflation is far from over.

Here’s the deal: The headline figure is distressing for just about everyone — consumers are having to stretch their dollars further to manage day to day expenses, and businesses’ profits are taking a hit. Plus, it’s a political nightmare for Democrats heading into midterm elections this fall.

Wall Street also let out a guttural cry on the news this morning. Stocks fell as investors grappled with the now all-but-certain prospect of the Federal Reserve taking more aggressive steps to tame price increases.

Here are four key takeaways from the report, courtesy of Nightcap contributor David Goldman:

  • Inflation isn’t going away anytime soon. “If the Fed was hoping to find signs that inflation is beginning to abate, they likely didn’t find it in today’s CPI report,” said Jason Pride, chief investment officer of private wealth at Glenmede. In the more pessimistic camp: “Inflation, while definitely slowing on the goods side, will remain much higher than pre-Covid levels for a few more years to come and thus will be sticky and persistent,” writes Peter Boockvar, CIO of Bleakley Financial Group.
  • Inflation is hot across the board. In previous reports, the headline figure was frequently pushed higher by a few outliers, like car prices or health care or rent. This time, it’s pretty much alllllll bad.
  • Gas prices are falling, finally. But it may not help much as the costs of housing and apparel and other necessities go up.
  • A recession is almost inevitable at this point.

Let’s unpack this last point for a minute …

The Federal Reserve has two primary missions: ensure maximum employment and keep prices stable.

If we were grading the Fed on these fronts, it’d be getting an A on the employment front — jobless rates are near a 50-year low and hiring is going strong. But it’s clocking a D-minus on prices. It’s clear now that the central bank waited way too long to pump the brakes on its easy-money policies. In playing catch-up, it’s going to have to raise rates more aggressively, increasing the chances of a recession. (The Fed uses interest rates to make borrowing more expensive, which damps demand and, ideally, takes the heat off prices. If it goes too hard, however, demand could crater and push the economy into a recession.)

BUT! Unless things change drastically, the next recession won’t look as bad as you might remember from, say, the early 1980s or the late 2000s, or the sharp, short-lived contraction of 2020. Those recessions, and the ones that preceded them, were defined by a high unemployment.

Bank of America is forecasting a “mild” recession in which unemployment would rise to 4.6% from its current 3.6%. That’s still well below the April 2020 high of nearly 15%.

Some analysts are more optimistic: Goldman Sachs said this week the risk of a recession over the next year stands at just 30%, although it rises to nearly 50/50 odds over the next two years.

LOOK AHEAD: The hottest event of the summer (for econ policy wonks) will come in two weeks, when the Fed emerges from its policy meeting to announced its next interest rate move. Before Wednesday’s disastrous CPI report, the smart money was on another 50- or 75 basis point increase, aka a half or three-quarters of a percentage point. But Wall Street is now pricing in a more dramatic hike of a full percentage point, according to the CME’s FedWatch tool. That big of a jump is unprecedented in modern history.


Here’s a sentence that would have made no sense just a few years ago: Two Italian crypto-investing brothers just shelled out $2.5 million on a bottle of Champagne that comes with digital ownership of five non-fungible tokens. That’s real, I didn’t make it up. It was the most expensive Champagne ever sold at auction (and I hope it tastes like vinegar).


In the early 90s, the New York Times described the Gap thusly: “as ubiquitous as McDonald’s, as centrally managed as the former Soviet Union and as American as Mickey Mouse.”

The Gap was the cool kids shopped for all manner of denim (and later, somewhat regrettably, for khaki capris. RIP, 1998 fashion). It won over moms, celebrities and suburban kids who were neither edgy enough to pull off the grunge look nor wealthy enough for the preppy-chic aesthetic.

It was vanilla, and made vanilla desirable … For a time. These days, the brand is barely clinging to life.

On Monday, the company announced CEO Sonia Syngal would step down after less than three years. She will be replaced by an interim CEO while the company searches for a permanent leader. Sales at the Gap and its sister brands Old Navy and Banana Republic have slumped for years, my colleague Nathaniel Meyersohn writes.

What the heck happened?

This brand was once so powerful it single-handedly made unironic swing dancing a Thing. Now, not even a Yeezy partnership can meaningfully lift it from obscurity.

Part of the problem, Nathaniel writes, is that the Gap’s fortunes have largely been tied to those of malls — great news in the ’90s, but awful news now. (True story: My mom and I used to drive over an hour to a mall in Kansas City simply because it had a Gap that our smaller local mall lacked).

By 2024, the brand plans to close 30% of its Gap and Banana Republic stores in North America — mostly in malls.

Then came the fast-fashion competition: H&M and Zara lured shoppers away . Direct-to-consumer brands online have also chipped away at the Gap’s audience.

Its revival plans “have been piecemeal rather than part of a coherent grand plan of reinvigoration,” said Neil Saunders, an analyst at GlobalData Retail, in a note to clients Monday.

Time for a comeback?

The Gap’s not without hope, but its near future hinges on getting a new leader in place and leaning into the successes of its Old Navy and Athleta brands, which, combined, will represent about 70% of Gap’s total sales by 2023, the company says.

“The Gap’s failure is all about its lack of leadership,” said Mark Cohen, the director of retail studies at Columbia University’s business school. “They had a brilliant period of growth and popularity, which they frittered away.”

Enjoying Nightcap? Sign up and you’ll get all of this, plus some other funny stuff we liked on the internet, in your inbox every night. (OK, most nights — we believe in a four-day week around here.)
 Source link

Back to top button