UNEMPLOYMENT IN THE U.S. HAS JUST REACHED ITS HIGHEST LEVEL IN FOUR YEARS 🚨
And this is a nightmare for the Fed.
Today, the unemployment rate was announced at 4.6% compared to an expectation of 4.5%, and this is the highest reading since September 2021.
And this points to a serious danger.
This tells us that the U.S. labor market is currently weaker than at any time in the past four years.
Hiring is slowing down.
Growth is losing momentum.
At the same time, inflation is still around 3%, significantly higher than the Fed's 2% target.
This is the worst scenario for the Fed.
Growth is slowing down, but inflation remains high. That is the definition of stagflation.
And stagflation leaves the Fed with no good options.
If the Fed does not cut interest rates, the risk of recession will rise rapidly.
A weak labor market combined with high interest rates usually leads to accelerated job losses.
But if the Fed cuts interest rates, inflation could accelerate again.
We have seen this before.
In 2020, the Fed cut too aggressively, and inflation exploded in 2021.
In 2022, the Fed was forced to begin QT and raise interest rates aggressively.
Now the Fed is stuck between two mistakes.
This is why unemployment data is so important.
The Fed had already planned extensively not to cut interest rates in January.
This surge in unemployment is putting that plan under pressure.
Ignore the data, and the risk of recession.
Reacting too quickly, and the risk of another wave of inflation.
There is also a larger historical warning here.
In the 1970s, the U.S. economy faced a similar situation.
Inflation rises, unemployment rises while economic growth stagnates.
Back then, the Fed raised interest rates to nearly 20% and crushed inflation.
But this led to a decade of losses, when the S&P 500 had a return of 0% from 1970-1980.
The risks today are similar but not to that extent.
Still, the Fed needs to push back against this.
If the Fed focuses on reviving the labor market, there will be a rally first followed by a major collapse.
If the Fed focuses on cooling inflation, there will be a major collapse followed by a strong rally.
I don't think the Fed will do what they did in 1970, so there will be more easing in 2026.
But what happens next will be very clear.
