Federal Reserve’s fortitude to be tested in months ahead. Next key data comes Friday

The Federal Reserve building in Washington, D.C., is encased in rock. It’s Creole marble from Georgia. The stone is considered relatively soft, which makes it easier to cut. The marble strikes a majestic image of stability and resoluteness just blocks from the Potomac River.

The central bank’s fortitude will be tested in the months ahead. Does it have the determination to keep raising interest rates (or maintain them at higher levels) to squeeze inflation if the job market turns brittle?

The latest test comes Friday in the week ahead with the release of the September jobs report.

Make no mistake that the employment market has been strong. It has added an average of over 435,000 jobs per month since the beginning of the year. That’s more than double the pace of 2019, the year before the COVID-19 pandemic.

It has now been six months since the Fed reversed course and began raising its target short-term borrowing rate in its effort to fight inflation. That first step was small and late. The bankers have since accelerated their rate hikes and toughened their public comments in hopes of cooling inflation and repairing confidence in the Fed’s reputation to effectively manage America’s financial system, and by extension, the economy.

The Fed is caught between the proverbial rock and, er, marble. Strong hiring and wage growth in September will be seen as more evidence for more interest rate hikes — for higher and longer. A weakening job market will be interpreted as a sign of a deteriorating economy, pressuring the central bank to ease its inflation fight before it is over.

Long-term investors are squeezed. The bear market this year has erased 80 percent of the stock market rally ignited by the trillions of dollars of pandemic aid that poured into the U.S. economy. The wealth effect of that COVID-induced rally has crumbled.

Intense pressure and heat create marble. The beautiful stone emerges only after thousands of years. Economic pressure between inflation and the threat of a weakening job market continues building for companies, and consumers. Increasingly, investors are convinced that pressure means a more brittle economy.

Tom Hudson is a financial journalist in Washington, D.C. He’s the chief content officer at WAMU public radio station.

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