Markets are worried the Fed is going too far

New York(CNN Business) A closely watched measure of inflation in the United States is expected to tick higher in September even as the Federal Reserve moves to fight rising prices at its most aggressive pace in decades. Wall Street is worried that yet another high reading on the Consumer Price Index will prompt another massive interest rate increase and inflict more pain on markets and the US economy.

What's happening: On Thursday, the Bureau of Labor Statistics will release the Consumer Price Index, which measures a basket of goods and services, for September. Analysts surveyed by Refinitiv expect an increase of 8.1% over the 12-month period ended in September, a slower pace than 8.3% year-over-year in August. Excluding food and energy prices, however, analysts expect a year-over-year increase of 6.5%, up from 6.3% in August.

Why the market is worried: Investors are concerned that a data-driven Federal Reserve will likely view elevated numbers as a mandate to continue on with aggressive interest rate hikes, increasing the odds of a painful recession in the United States.

But this full-steam-ahead approach by the Fed, based on the notion that iron-clad data is protection enough, has given some economists pause. Greg Mankiw, a Harvard University economist and former chair of the Council of Economic Advisers in the George W. Bush administration, joined a group of bipartisan economists this month to argue that the Fed is "braking too hard."

Monetary policy impacts the economy with a lag, as the Fed has noted in the minutes of its meetings. There's a possibility, some economists argue, that the Fed has already brought inflation down and the delay in that showing up in the numbers is causing the central bank to overcorrect, propelling the economy into an unnecessary downturn.

"In the long history of Federal Reserve mistakes, one general error stands out. They tend to wait too long and then do too much," wrote David Kelly, chief global strategist of JPMorgan Funds in a note Tuesday. "They appear to be well on their way to repeating this error today."

Signs of recovery: Signs of price moderation are beginning to show through.

Food commodity prices have come down from their spring peaks, and wholesale used car prices have fallen. Crude oil prices, even with last week's OPEC+ production cuts, are still well below their summer highs.

Last week's nonfarm payroll report roiled markets, but job openings have now fallen by 1.8 million since their March peak. That's the biggest decline ever outside of a recession, according to Goldman Sachs analysts.

Core CPI -- a metric closely watched by the Fed because it strips out volatile food and energy prices -- will be slow to reflect these changes. That's because shelter prices account for over 40% of the number, wrote Jan Hatzius, Goldman Sachs' chief economist. Rent and housing prices are showing signs of softening, he wrote, but they'll take a year to fully show up.

The bottom line: CPI is just one of many data points the Federal Reserve considers, and Fed chair Jerome Powell has said that the central bank looks at multiple months of data, not just one report. Still, if markets perceive an overcorrection, more volatility lies ahead.

'The worst is yet to come,' warns IMF

The International Monetary Fund has once again downgraded its forecast for the global economy with a sharp warning: "The worst is yet to come, and for many people 2023 will feel like a recession."

The prospects for the global economy, as outlined by the IMF, are the third weakest since 2001, behind only the 2008 financial crisis and the worst phase of the coronavirus pandemic, reports my colleague Julia Horowitz.

"More than a third of the global economy will contract this year or next, while the three largest economies — the United States, the European Union, and China — will continue to stall," said Pierre-Olivier Gourinchas, the IMF's chief economist.

The IMF believes that global inflation will peak late this year, but will "remain elevated for longer than previously expected," even as central banks work aggressively to bring it under control.

Major central banks aim for inflation near 2%, and have been hiking interest rates in a bid to limit price rises. But their campaigns are also boosting risks to the economy.

If they go too hard, it could exacerbate a global downturn, while dialing back efforts could allow inflation — which the IMF called "the most immediate threat to current and future prosperity" — to become entrenched.

"Central banks around the world are now laser-focused on restoring price stability, and the pace of tightening has accelerated sharply," Gourinchas wrote. "There are risks of both under- and over-tightening."

Supply chain chaos: The freight railroad strike threat is back

Here comes another unwelcome development for markets: Supply chain issues could soon get much worse.

A union of railroad track maintenance workers has rejected a tentative agreement with US freight carriers, renewing the threat that there could be a strike that shuts down a vital link in the nation's already struggling supply chain, report my colleagues Chris Isidore and Vanessa Yurkevich.

The vote, announced Monday by the Brotherhood of Maintenance of Way Employes Division, was 43% in favor of the proposed five-year contract, and 57% opposed.

The BWME said it will now enter negotiations in an effort to reach a new deal. Without a new deal there could be a strike, but not until at least Nov. 19, according to the union.

Major railroads carry 30% of the nation's freight when measured by weight and distance traveled, and a strike could cause shortages and higher prices for essentials such as food and gasoline. It could also force factories without parts to close down and leave store shelves empty during the holiday shopping period.

Up next

Pepsi reports third quarter earnings. 

The US Bureau of Labor Statistics releases the Producer Price Index at 8:30 a.m. ET. 

Coming later this week:

▸ Earnings reports from big banks like JPMorgan Chase, Wells Fargo, Citigroup, Morgan Stanley, PNC and US Bancorp.

▸ The Consumer Price Index, a closely watched measures of inflation in the US is due to be released on Thursday.