This story is part of CNN Business’ Nightcap newsletter. To get it in your inbox, sign up for free, here.
Some funny things are going on with the Federal Reserve. And by funny, I mean like the way you sometimes giggle while watching a horror movie and the monster is about to jump out and devour a bunch of people.
Here’s the thing: The Fed right now is wearing blinders, and it only cares about bringing down inflation, my colleague Paul R. La Monica writes.
Jay Powell and Co. are on the warpath, convinced that everyone will be better off in the long run if we accept the pain of higher interest rates — and a possible recession — now rather than let inflation become entrenched. They may be right, but that doesn’t mean all of this doesn’t suck.
And there is growing concern among economists and analysts who think the Fed is overcorrecting. After all, the central bank spent much of last year playing down the inflation threat as “transitory,” a word Jay now wakes up screaming in the middle of the night.
On the Silver Fox’s watch, inflation clearly got out of control, and now he’s going all Inigo Montoya on it with the biggest sword in his arsenal: interest rates.
Investors are pricing in a high probability of a yet another three-quarters of a percentage point hike at the Fed’s next meeting on November 2. That’d be the fourth in a row. Wagers on a fifth such hike in December are also on the rise.
We get it, Jay: You were too blasé about inflation early on and now you’re very, very sorry.
But maybe you don’t need to go quite so hard? After all: Inflation seems to have peaked at 9% in June; supply chains are healing; and the housing market is cooling significantly.
The Weed Gummy Theory
There’s an analogy offered by investment analyst Peter Boockvar last month that I can’t stop thinking about. He compared the Fed to an eager but inexperienced consumer of weed gummies, which, notoriously, take longer than anyone expects to kick in. (Note: Boockvar wanted to be clear that he does not partake, but he’s heard things. (I got you, Pete.) )
Anyway, the classic newbie mistake is to eat more gummies before the effects of the first dose have set in, only to find yourself tripping too hard when all of the not-so-groovy feelings hit at once.
Fed vice chair Lael Brainard even nodded to concerns about the long lag effects of rate hikes in a speech this week, noting that “policy actions to date will have their full effect on activity in coming quarters.”
In other words, we may find ourselves in 2023 doing the macroeconomic equivalent of curling up in the fetal position on the couch, murmuring to no one in particular that that last gummy was too much, man.
The unintended consequences are hard to predict. But analysts Paul spoke with pointed to a few areas of concern:
- Credit crunch: The surge in interest rates could lead to a “consumer credit crunch being more pronounced,” said Michael Weisz, president of investment firm Yieldstreet. That means loans, including mortgages, would become more expensive and harder to get.
- Bankruptcies: Rate hikes make it more expensive for companies to pay down debt, increasing the risk of corporate bankruptcies and defaults.
- Stagflation: The rather ugly one-two punch of stagnant growth and higher prices. Think wages going down, more people unemployed, but prices stay elevated.
Bottom line: “The Fed runs a real risk of over-tightening, as the impacts of the restrictive policy may not flow through inflation and unemployment data until it’s too late,” Weisz said.
NUMBER OF THE DAY: 0.4%
In a sort of amuse-bouche of inflation data, the Labor Department released the US Producer Price Index reading for September on Wednesday. And I know this will be a shock but … it was not great news.
The so-called PPI, which tracks what suppliers charge other businesses for goods and services, showed prices going up 8.5% from a year ago. That’s down slightly year-over-year from August 2021, but up 0.4% month-over-month.
Bottom line: Prices are still running hot. And because businesses pass their added costs on to you and me, we can expect to see that the more closely watched Consumer Price Index inflation gauge, due out Thursday, is still frustratingly high, despite the Fed’s aggressive campaign to tamp prices down.
FOOD NEWS
We’re back with another hot serving of all the news that’s fit for human consumption. Let’s dig in.
COFFEE WARS
In the perpetual battle betwixt the Houses Dunkin and Starbucks, the green siren of the Pacific Northwest just added a star to her crown.
Here’s the deal: Starbucks just expanded its rewards program to give loyal customers a bit of extra mileage, while Dunkin is facing a backlash from fans after it scaled back its perks.
The Bux is partnering with Delta to reward one mile of air travel for every dollar spent at Starbucks. An added perk: On days that rewards members are scheduled to fly on Delta, they earn double points.
New England native Dunkin, meanwhile, recently updated its rewards program to make it harder to earn a free drink. Now, instead of getting a freebie after spending $40, you have to spend $70. Good thing Bostonians are totally level-headed people who are not at all prone to overreact to change …
EAT FRESHER
Subway’s menu makeover is paying off. The privately held chain said sales were up nearly 8.5% in the third quarter, hitting records across its 20,000 US locations.
Seems that whole “is Subway tuna real?” scandal isn’t hurting the company too badly, even though a judge ruled this summer that customers could sue over Subway’s claim that its tuna salad is “100%” tuna.
DUST TO DUST
In what I can only assume is a very expensive and rather strange PR stunt, Cheetos has erected a 17-foot-tall statue of a hand holding a Cheeto, its fingers covered in bright orange cheesy residue.
They plopped this thing down in the tiny hamlet of Cheadle, in Canada’s Alberta province. Get it? “Cheetle” is what Cheetos HQ calls the sticky orange dust that lingers on one’s fingers.
Great news for the next time you’re on vacation in Calgary and feel like driving 40 minutes out of town …
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 work week around here.)
