Macroeconomist Adam Kobisi said the risks facing the Fed are increasing and the current economic outlook resembles “the Fed’s worst nightmare.”
One of the Fed’s most significant limitations, Kobessi said, is that it can only control inflation from the demand side and cannot intervene directly in response to supply-side shocks.
The analyst noted that surging energy prices, in particular, are creating supply-driven inflationary pressures that would force the Fed to take more aggressive steps to suppress demand. Kobeisi recalled that the opposite happened during the 2020 pandemic, when the collapse in demand led to interest rates being reduced to zero, but said that today, due to the rise in energy prices, a completely different situation appears.
According to Kovesi’s model, rising oil and gas prices could push U.S. consumer inflation (CPI) to 3.5%, about 150 basis points above the Fed’s long-term target. In theory, this would require monetary tightening and interest rate hikes, but current macroeconomic conditions make this difficult, analysts said.
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Koveisi added that weakness in the labor market has become particularly pronounced, and said that despite recent monetary easing, there has been no noticeable improvement in employment. As such, he warned that the U.S. economy could face a severe unemployment crisis if the Fed raises interest rates.
Meanwhile, Kobisi said that if the Fed does not tighten monetary policy, inflation could exceed 4%, adding that this will depend on the period of geopolitical risks, particularly around Iran. In this regard, the analyst said the Fed faces two difficult choices, and that either inflation above 3.5% or unemployment above 5% may be inevitable scenarios.
*This is not investment advice.
