The Fed Is Fighting the Wrong War
The Federal Reserve made a mistake, again. Raising rates in this environment doesn’t fight inflation. It fights the economy, while the actual source of inflation keeps burning in plain sight: oil.
This Isn’t Demand-Driven Inflation. It’s an Energy Shock.
Rate hikes are a blunt tool designed for one job: cooling off an overheating economy where too much money is chasing too few goods and services. That is not what’s happening right now.
What’s happening right now is a supply shock. Oil is trading well above $90 a barrel, diesel has hit record highs, and the ripple effects are showing up everywhere, trucking costs, shipping costs, food costs, manufacturing costs. Diesel isn’t a niche input. It’s the fuel that moves nearly everything in the economy from a warehouse to a store shelf. When diesel spikes, the cost gets baked into the price of almost everything downstream, whether or not consumer demand has changed at all.
Raising interest rates does nothing to lower the price of oil. It doesn’t reopen a shipping lane, repair a damaged pipeline, or negotiate a ceasefire. What it does do is make it more expensive for businesses to borrow, expand, hire, and invest, piling a self-inflicted wound on top of an external one. The Fed is treating a supply-side energy problem with a demand-side hammer, and the only thing that gets nailed is the consumer and the labor market.
The Jobs Data the Fed Is Leaning On Is Softer Than It Looks
Here’s the part that should really give the Fed pause: the labor market data it’s using to justify staying hawkish is not as solid as it’s being treated.
The BLS jobs report is built on a survey, businesses filling out forms, self-reporting headcounts, with the data collected through phone, fax, and electronic questionnaires. It’s a well-constructed survey, but it’s still a survey, and it comes with real limitations: sampling error, non-response, and a track record of large revisions after the fact. We’ve watched this play out repeatedly, a headline number gets reported, markets and policymakers react to it, and months later it gets quietly revised by tens or even hundreds of thousands of jobs.
ADP’s employment report works differently. Rather than asking businesses to self-report on a form, it’s built from actual payroll processing data, real transactions covering tens of millions of workers who are actually being paid, in real time, through ADP’s systems. It’s not a business estimating its own headcount on a questionnaire; it’s the payroll data itself.
That distinction matters. A survey response and a processed paycheck are not the same category of evidence, and treating them as interchangeable, while giving the survey-based number outsized weight in a rate decision, is exactly the kind of thing that leads to policy mistakes getting locked in before the real picture becomes clear.
The Bottom Line
Inflation right now has an address, and it’s the pump, not the paycheck. Raising rates to fight oil-driven inflation doesn’t lower oil prices, it just slows down an economy that’s already showing cracks, using labor market data that deserves more skepticism than it’s getting. The Fed isn’t wrong to worry about inflation. It’s wrong about the cure.
SIDE NOTE: To be fair, there’s a case for the Fed’s approach too: even supply-driven inflation can become embedded if consumers and businesses start expecting higher prices to persist, and some economists argue that raising rates helps anchor those expectations regardless of the initial cause. There’s also a reasonable argument that the BLS survey, despite its revisions, still benefits from a larger and more consistently structured business sample than ADP’s payroll-based data, and that the two measures are best used together rather than one replacing the other. Reasonable people disagree on how much weight the Fed should put on an energy-driven inflation spike versus the risk of letting inflation expectations drift.
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