Fears that the Federal Reserve will cause a recession spread like wildfire after a hotter-than- expected inflation print caused the stock market to plunge.
The Fed has raised interest rates four times this year in an effort to cool rising consumer prices, with Fed Chair Powell saying that his inflation fight is "unconditional" and rate hikes will continue even if it means some pain for Americans.
The Bureau of Labor Statistics reported on Tuesday that inflation, as measured by the Consumer Price Index (CPI), rose by 0.1% in August and 8.3% compared to a year ago.
Experts were quick to sound the alarm about the rising potential for a Fed-driven recession after the inflation data went public.
The central bank will be forced to continue raising rates and shrink its balance sheet even as the economy slows, which will lead to a rise in unemployment, according to Chris Zaccarelli.
The only cure for the current crisis is politically infeasible, according to him. If the Fed thought they were criticized too much by the previous administration, wait until they see the type of criticism they will be under as they deliberately create an economic scenario where unemployment goes up.
They are going to cause a recession and it is going to be a bad one.
He isn't the only economist warning about the Fed.
The rise in core inflation, which excludes volatile food and energy prices, was a worrying sign according to ZipRecruiter's lead economist.
Core inflation is the figure most associated with future inflation and is the focus of the report. She said that the August rise of 0.6% was a shock. It suggests that the Fed may have to raise rates for longer to tame inflation and cause more pain for the housing market and labor market.
Gregory Daco said that the Fed's goal of a soft landing where inflation is controlled without sparking a recession is out of reach due to the rise in core inflation.
Daco told Fortune that inflation remains broad based and that the sequential momentum for coreCPI portends to only a gradual easing of inflationary dynamics. The risk of a hard landing is increased by higher and more persistent inflationary pressures.
The hot inflation reading means that stocks will face pressure as rising rates increase the cost of borrowing and lower market valuations.
"Unfortunately for markets, this print will reinforce the need for the Fed to remain aggressive and will likely keep a lid on risk assets over the foreseeable future."
The latest report on the consumer price index wasn't all bad. In August, energy prices fell due to a decrease in gasoline prices. The price of used cars fell last month after spiking during the Pandemic.
The inflation report wasn't what Wall Street was hoping for 70% of the categories that make up the consumer price index saw an annual price increase in August. Energy price relief may not last despite gas prices dropping sharply.
Jeffrey Roach, the chief economist at LPL Financial, told Fortune that he fears rising electricity and natural gas prices this winter will wipe out the savings Americans have earned from falling gas prices.
Roach said that rising food costs are a concern. The year-over-year increase in food prices was the largest in 37 years.
Lower-income households who spend more on food are hurt by inflation pressures.
Shelter inflation is the main concern of economists. Shelter prices rose in August.
Shelter prices make up 32% of the consumer price index and 8% of it is rent, which is determined by a monthly survey.
Liz Ann Sonders, the chief investment strategist at Charles Schwab, said on Tuesday that the OER portion of August'sCPI reading showed a 6.3% year over year jump. Since April 1986 that increase has increased at the fastest rate.
Jay Hatfield, CIO of Infrastructure Capital Advisors, told Fortune that the housing sector is critical as it is likely to be a consistent contributor to inflation.
Hatfield believes the Fed will eventually be able to control inflation by raising interest rates and decreasing its balance sheet.
Hatfield said that they were optimistic that inflation would decline over the next six months as the Fed reduces money supply.
In a Tuesday research note, Bank of America economists argue that price stability won't come until 2024. The BofA team is worried about the possibility of a hard landing for the US economy.
The Fed's work is only just beginning and the solid reading on coreCPI and core goods prices suggests that underlying price pressures remain firm. Employment gains and core inflation readings point to more monetary policy tightening and hard landing risks.