Article by Wu Yu, Jin10 Data
As oil prices approach $100 per barrel, a market strategist warned that if the Fed raises interest rates in response to this energy price shock, it could repeat the most damaging policy mistake before the 2008 financial crisis—mistaking price increases caused by an energy supply shock for signs of economic overheating.
James Thorne, Chief Market Strategist at Wellington Altus, stated plainly on social platform X on Monday: "Basic economics: You can't raise interest rates during an energy supply shock!"
He further questioned whether the Federal Reserve, led by Kevin Warsh, would repeat the European Central Bank’s mistake of tightening policy in response to energy supply shocks, mistaking price increases caused by external factors for signs of overheating demand.
Thorn draws a parallel between the current situation and 2008, when then-Fed Chair Ben Bernanke warned that rising energy prices "increased the upside risks to inflation and inflation expectations." Thorn argues that the Fed at the time overemphasized the risks of inflation and inflation expectations while neglecting how high energy prices were eroding household purchasing power and dragging down economic growth.
He noted that investors often remember the Federal Reserve's emergency rate cuts following the collapse of Lehman Brothers, but tend to overlook that the Fed had already begun considering policy tightening at the time, while the European Central Bank raised rates just before the financial crisis hit.
Thorn believes that the current policy signals from the Federal Reserve and the European Central Bank resemble the narrative before the 2008 crisis—that they may further tighten financial conditions and suppress demand to demonstrate their resolve in combating inflation amid energy shocks.
"Will the Federal Reserve actually learn from this?" Thorne asked. "We know the European Central Bank didn't."
He believes the European Central Bank has repeated this mistake. The ECB raised interest rates by 25 basis points to 2.25% in June, becoming the first major central bank to hike rates in response to inflation triggered by the Iran war; markets widely anticipated another 25-basis-point increase at its September 10 meeting, with traders assigning a 99% probability to such a move.
Rising oil prices provide a real-world backdrop for these concerns. Over the past month, U.S. WTI crude has risen more than 20%, while Brent crude has increased over 18%. U.S. gasoline prices reached $4.15 per gallon over the Labor Day weekend, setting a new historical record for September.
Households are under financial pressure, but the labor market remains resilient.
Meanwhile, a survey released by the New York Fed on Tuesday found that U.S. consumers’ views on their financial situation are deteriorating. In August, 38.6% of respondents said their household finances were “significantly worse” or “somewhat worse” than a year ago, up from 37.6% in July; the share expecting their financial situation to worsen further over the next year also rose from 30.3% to 32.6%.
Labor market indicators showed divergence. Respondents perceived the probability of unemployment over the next year as falling to 13.8%, the lowest since February; the likelihood of voluntary job separation rose for a second consecutive month to 19.5%, above the 12-month average. However, the average probability that overall unemployment will rise over the next year increased to 44.4%, the highest since April 2020; among those who lose their jobs, the probability of finding new employment within three months fell to 45%.
Inflation expectations have slightly improved. Consumers’ inflation expectations for the next year and five years remain at 3.6% and 3%, respectively, while the three-year expectation has slightly decreased from 3.3% in July to 3.2%.
Previous employment data still indicated resilience in the labor market. In August, U.S. non-farm payrolls increased by 162,000 jobs, surpassing all expectations in the Bloomberg survey, while the unemployment rate remained steady at 4.1%.
The Federal Reserve will hold its policy meeting in Washington from September 15 to 16, following five consecutive meetings where rates were held steady. At the previous meeting, three officials favored a 25-basis-point rate hike, and an increasing number of officials are questioning whether current rates are sufficient to curb inflation.
The U.S. Bureau of Labor Statistics will release the August Producer Price Index (PPI) on Thursday and the Consumer Price Index (CPI) on Friday; these data points will serve as key inputs for the Fed in assessing its current policy dilemma.