Investing.com — The Federal Reserve could be falling behind in its efforts to combat slowing growth, according to the latest Sevens Report note.
The firm said that while the central bank is still expected to cut rates soon, the higher-than-expected Core CPI reading has raised concerns that the Fed may not move quickly enough to prevent an economic slowdown.
Although the Core CPI came in firmer than expected, Sevens says the primary driver was shelter costs, which are widely believed to overstate housing inflation.
“If we excluded housing from Core CPI, yesterday’s Core CPI reading would have increased just 0.1%,” they explained, downplaying fears of a significant inflation resurgence.
Despite this, the inflation data has reduced the likelihood of a 50-basis-point rate cut by the Fed.
The real risk, according to Sevens, is that the Fed could fall behind the curve as real interest rates continue to rise.
“Real interest rates are now putting more pressure on the economy than they have at any point during the Fed’s tightening cycle,” Sevens stated.
As of now, real interest rates stand at 3.45%, the highest level throughout the tightening cycle, creating more significant headwinds for economic growth.
While the Fed is still expected to cut rates next week, Sevens believes a 25-basis-point cut is more likely due to the concerns around cutting too aggressively with Core CPI still elevated.
This slower rate-cutting pace could “increase the possibility the Fed is behind the curve and ultimately does not cut rates fast enough to prevent a worse-than-expected slowdown.”
The note concludes that while the long-term outlook remains positive, markets are vulnerable to a growth scare, which could lead to more volatility and a potential correction.
