Inflation has climbed again while the labor market has cooled, with unemployment rising to 4.3% and consumer prices accelerating above the Fed’s 2% target. The combination of slowing growth and rising prices is described as stagflation, a difficult environment for policymakers. Kevin Warsh was sworn in as Fed chair at a White House ceremony, with a historical comparison to 1987, when a similar transition preceded Black Monday. Markets are portrayed as vulnerable because valuations are stretched, with the S&P 500 trading near 25 times forward earnings versus a 10-year average near 19. Inflation pressures are also linked to oil price shocks and supply disruptions, reducing tolerance for policy errors.
"Inflation has started climbing again, even as the labor market cools. Unemployment is up to 4.3% while consumer prices accelerated above the Fed's 2% target once again. That combination - slowing growth and rising prices - is the economic nightmare policymakers call stagflation."
"Last Friday, new Fed Chair Kevin Warsh was sworn in during a ceremony in the East Room of the White House. Market historians immediately got the chills. Only one other time has a Fed chair been sworn in at the White House: Ronald Reagan swearing in Alan Greenspan on Aug. 11, 1987. That year should sound familiar. Just over two months later came Black Monday."
"That matters today because stocks already sit near historically stretched valuations. The S&P 500 trades near 25 times forward earnings, well above its 10-year average closer to 19. Meanwhile, inflation pressures are building again from Iran war oil price shocks and supply disruptions. In other words, the market may not have much room for policy mistakes."
"President Trump reportedly favored Warsh because he supports lower interest rates and a more growth-friendly Fed. Investors love rate cuts when the economy slows because cheaper borrowing boosts housing, business investment, and stock valuations."
Read at 24/7 Wall St.
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