The Fed’s war on inflation could bring down the entire US economy

This story is part of CNN Business’ Nightcap newsletter. To receive it in your inbox, sign up for free, here

New York
CNN business

Tuesday’s inflation reading was not what anyone expected.

The consumer price index rose 8.3% year-on-year in August, down slightly from July, but more than the 8.1% economists had expected. Excluding the price of food and energy, core prices rose 0.6% from July to August—double what economists had forecast.

The surprisingly ugly CPI report dented investor confidence and sent markets down. The Dow fell more than 1,200 points, or 4%, while the S&P 500 and Nasdaq fell 4.3% and 5.2%. It was Wall Street’s worst day since June 2020.

And, in the latest major economic data released ahead of next week’s Federal Reserve policy meeting, Tuesday’s report ensured that the central bank will announce another interest rate hike.

Let’s rewind: All of this is bad news for consumers, who are dealing with a quadruple whammy of financial pain—inflation is eating away at everyone’s wallet; higher interest rates are making it harder to borrow money; salaries are mostly flat; and 401(k)s are a disaster as the market sinks.

(Oh, and if you missed last night’s bulletin, there’s a strike by freight rail workers later this week that could further strain supply chains and drive up prices).

The Fed has been raising rates for the past six months, and is still far from its inflation target of around 2%. At this point, is it time for the price problem to be too big for central banks to solve on their own?

Short, not-super-satisfying answer: Probably.

The main problem here is that no one—whatever they say in their hot Twitter tweets or endless TV commentary—really knows what to do here in this crazy economy that has been wracked by unprecedented shocks.

Rising interest rates should slow demand, for sure. But ending the war in Ukraine would be a bigger help (on so many levels). The Fed can’t do that. Freeing up supply chains would also be good. (Neither does the Fed’s jurisdiction.) Eradicating covid and stopping climate change couldn’t hurt. (I wish Jay Powell would start, fingers crossed for that to happen, but alas, he can’t).

“The economy is in a very unusual place, and some of this may be the result of a very unusual pandemic,” says David Wessel, senior fellow at Brookings and director of the Hutchins Center for Fiscal and Monetary Policy.

But that’s nowhere near the crisis the Fed faced in 2007 and 2008, when the financial system collapsed and the Great Recession took over.

“We have a very strong labor market, strong consumer demand and high inflation,” says Wessel. “The Fed needs to raise interest rates. And the point is that they still haven’t raised enough to slow down the economy.”

So what will the Fed do?

Tuesday’s report is building up a sense of urgency to control inflation by any means necessary. Most observers expect Jay Powell to announce another hike of three-quarters of a point, although the odds of a full-point hike — unthinkable before this week — are not insignificant.

Nomura economists on Tuesday adjusted their forecast for the Fed’s September meeting to a 1-point hike from 0.75 percentage point, saying “a more aggressive path of interest rate hikes will be needed to tackle increasingly entrenched inflation,” according to Bloomberg. .

Investors are pricing in a 22% chance of a full point move next week, according to CME Group’s Fed Watch tool.

In any case, the Fed’s prescription is to stay the course and keep raising rates, which should eventually push prices down as consumers and businesses push back on higher borrowing costs. But it seems increasingly likely that the Fed will be able to do this by stifling demand so much that the economy will fall into recession, as Paul Volcker predicted in the early 1980s. Powell and company are making a calculated bet that the short-term pain of a recession is preferable to the long-term pain of inflation.

READ MORE: Food prices have increased by 13.5% in the past year, the largest increase since 1979. Egg prices have increased by almost 40%. Flour, 23%. Milk and chicken cost about 17% more.

Britain’s royal wills are kept under lock and key, so the full extent of Queen Elizabeth II’s personal wealth will remain a family secret indefinitely. But one thing we do know is that Prince William, who is next in line to the British throne, is now a much richer man. The future king inherits a sprawling portfolio of nearly 140,000 hectares worth around £1 billion ($1.2 billion) from his father, King Charles III, of the private Duchy of Cornwall.

In DC, Congress turned a deaf ear to Twitter’s former security chief, who is speaking publicly about what he sees as serious security vulnerabilities – just one of the twists and turns complicating the company’s court battle with Elon Musk.

In an extensive hearing that lasted more than two hours, Twitter whistleblower Peiter Zatko made his concerns known. If you, like me, have spent the day drooling over the CPI report (or whatever) and missed the hearing, fear not. My colleague Clare Duffy has compiled some of the highlights.

And if these don’t inspire someone at HBO or Netflix or Hulu to pick up a 13-episode series on the entire saga, I don’t know what will:

  • First, the spies: Twitter is extremely vulnerable to exploitation by agents of foreign governments, Zatko said. At one point during his tenure at the company, Zatko said he raised concerns with an executive because he was certain a foreign agent was on the payroll. The executive’s response, according to Zatko, was: “Well, since we already have one, what’s the problem if we have more? Let’s continue to grow the office.’
  • Fines, shmines: Zatko said Twitter has more or less dealt with threats from US regulators, who expect the company to pay fines or penalties in response to violations. Those fines were rolled into his business, he said.
  • User data: Zatko detailed the personal information Twitter collects about users, including phone numbers and emails, IP addresses, and the locations from which users access the platform. He also alleged that Twitter does not fully understand all the user data it collects, why it is collected or where it is stored.
  • Just…wow: Zatko posed a scary hypothetical: “It’s not far-fetched to say that one Twitter employee could hold every senator in this room accountable.”

Twitter responded by reiterating that it had previously rejected Zatko’s claims, which were reported by CNN and the Washington Post last month.

“Today’s hearing only confirms that Mr. Zatko’s allegations are riddled with inconsistencies and inaccuracies,” a Twitter spokesperson said in a statement to CNN.

The company has not directly responded to a list of Zatko’s specific allegations, including the company’s alleged inability to detect whether foreign agents are on its payroll and the FBI warning that Twitter may have at least one Chinese agent at the company. .

Meanwhile, Twitter shareholders on Tuesday voted in favor of Elon Musk’s $44 billion buyout deal, as widely expected.

Enjoying a nightcap? Give your name and you’ll get all that, and other fun stuff we love on the internet, delivered to your inbox every night. (Okay, most nights – around here we believe in the four-day work week.)