The Fed may be further behind the curve by Investing.com

Investing.com — The Federal Reserve may be lagging behind in its efforts to combat slowing growth, according to the latest Sevens Report note.

The firm said that while the central bank is still expected to cut rates soon, the higher-than-expected core CPI reading raised concerns that the Fed may not be moving quickly enough to prevent an economic slowdown.

Although core CPI came in firmer than expected, Sevens says the main driver was shelter costs, which are believed to overstate housing inflation.

“If we excluded housing from core CPI, yesterday’s value of core CPI would have increased by just 0.1%,” they explained, playing down fears of a significant resurgence of inflation.

Despite this, the inflation data reduced the likelihood of a 50 basis point rate cut by the Fed.

The real risk, according to Sevens, is that the Fed could be behind the curve as real interest rates continue to rise.

“Real interest rates are now putting more pressure on the economy than they have at any point during the Fed’s tightening cycle,” Sevens said.

Real interest rates currently stand at 3.45%, the highest level during the tightening cycle, creating headwinds for economic growth.

While the Fed is still expected to cut rates next week, Sevens believes a 25 basis point cut is more likely due to concerns about cutting too aggressively, with core CPI still high.

This slower pace of rate cuts could “increase the possibility that the Fed will be behind the curve and ultimately not cut rates quickly enough to prevent a worse-than-expected slowdown.”

The note concludes that while the long-term outlook remains positive, markets are vulnerable to a growth scare, which could lead to more volatility and a potential correction.