Wait.....wait.....wait..... Give me 2 minutes and read this carefully ... Unemployment has reached its highest level in four years....
This is a nightmare for the Federal Reserve.
Today, the unemployment rate came in at 4.6% compared to the expected 4.5%, which is the highest level since September 2021.
This indicates a serious risk.
This tells us that the American labor market is now weaker than ever in the past four years.
Growth is losing momentum.
At the same time, inflation is still around 3%, much higher than the Federal Reserve's 2% target.
This is the worst setup for the Federal Reserve.
Growth is slowing, but inflation remains high. This is the definition of stagflation.
Stagflation focuses the Federal Reserve on bad options.
If the Federal Reserve does not lower interest rates, the risk of recession rises rapidly.
A weak labor market with rising interest rates usually leads to accelerated job losses.
But if the Federal Reserve lowers interest rates, inflation may accelerate again.
We have seen this before.
In 2020, the Federal Reserve over-eased, and inflation rose in 2021.
In 2022, the Federal Reserve was forced to begin QT and raise rates aggressively.
Now, the Federal Reserve is trapped between these two mistakes.
That’s why unemployment data is very important.
The Federal Reserve had generally planned not to lower rates in January.
This rise in unemployment puts that plan under pressure.
Ignore the data, and risk recession.
Respond very quickly, and risk another inflationary wave.
There is also a larger historical warning here.
In the 1970s, the American economy faced something similar.
Inflation was rising, and unemployment was rising while economic growth was stagnant.
At that time, the Federal Reserve raised interest rates to nearly 20% and crushed inflation.
But this led to a lost decade, where S&P 500 returns were 0% from 1970-1980.
The risk today is similar but not of the same magnitude.
However, the Federal Reserve needs to fight this.
If the Federal Reserve focuses on reducing inflation, there will be a massive collapse followed by a big recovery.
I don't think the Federal Reserve will do what it did in 1970, so more easing is expected in 2026.
But what happens next will be clear.
