Written by: Wu Yu, Jinshi Data
As oil prices once again approach $100 per barrel, a market strategist has warned that if the Federal Reserve raises interest rates amid an energy price shock, it could repeat one of the most damaging policy mistakes from before the 2008 financial crisis—misjudging price increases caused by an energy supply shock as economic overheating.
James Thorne, Chief Market Strategist at Wellington Altus, stated bluntly on social platform X on Monday: "Basic economics: You cannot raise rates during an energy supply shock!"
He further questioned whether the Fed, led by Kevin Warsh, would repeat the mistake of the European Central Bank by tightening policy during an energy supply shock, mistaking price increases driven by external factors for overheating demand.
Thorne linked the current situation to 2008. At that time, then-Fed Chair Ben Bernanke had warned that rising energy prices "added to upside risks to both inflation and inflation expectations." Thorne believes the Fed was overly focused on inflation and inflation expectation risks at that time, neglecting that high energy prices were weakening household purchasing power and dragging down economic growth.
He pointed out that while investors often remember the Fed's emergency rate cuts after the collapse of Lehman Brothers, they easily forget that the Fed had already begun considering tightening policy at the time, and the European Central Bank raised rates just before the financial crisis hit.
Thorne believes that the current policy signals from the Fed and the European Central Bank share similarities with the narrative before the 2008 crisis, namely the potential to further tighten financial conditions and suppress demand—perhaps to demonstrate a commitment to fighting inflation—during an energy shock.
"Will the Fed learn from this?" Thorne questioned, "We know the ECB did not."
He believes the European Central Bank has already repeated this mistake. The ECB raised rates by 25 basis points to 2.25% in June, becoming the first major central bank to hike rates due to inflation triggered by the Iran war; the market widely expected it to raise rates again by 25 basis points at its September 10 meeting, with traders assigning a 99% probability.
Rising oil prices provide a real-world backdrop for this concern. Over the past month, U.S. WTI crude has surged more than 20%, while Brent crude has risen over 18%. U.S. gasoline prices hit a record for September over the Labor Day weekend, reaching $4.15 per gallon.
Household Finances Under Pressure, but Labor Market Remains Resilient
Meanwhile, a survey released by the New York Fed on Tuesday showed that U.S. consumers' perception of their own financial situation is deteriorating. In August, 38.6% of respondents believed their household financial situation had "gotten much worse" or "somewhat worse" compared to a year ago, up from 37.6% in July; the proportion expecting their financial situation to worsen further in the next year also rose from 30.3% to 32.6%.
Labor market indicators presented a mixed picture. Respondents perceived the probability of losing their job in the next year fell to 13.8%, the lowest since February; the probability of voluntarily leaving a job rose for a second consecutive month to 19.5%, higher than the average of the past 12 months. However, the average perceived probability that the overall unemployment rate would be higher in a year increased to 44.4%, the highest since April 2020; if they lost their job, respondents' perceived probability of finding a new one within three months dropped to 45%.
Inflation expectations showed slight improvement. Consumers' expectations for inflation one year and five years ahead held steady at 3.6% and 3.0%, respectively, while the three-year-ahead expectation edged down from 3.3% in July to 3.2%.
Recent employment data still showed labor market resilience. U.S. non-farm payrolls increased by 162,000 in August, exceeding all expectations in a Bloomberg survey, with the unemployment rate holding steady at 4.1%.
The Federal Reserve is scheduled to hold a policy meeting in Washington from September 15 to 16, having already kept rates unchanged for five consecutive times. At the last meeting, three officials favored a 25 basis point rate hike, and a growing number of officials have begun questioning whether the current level of interest rates is 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 will be crucial for the Fed in navigating this policy dilemma.
