Macroeconomist Adam Kobeissi has a blunt assessment of where the Federal Reserve stands right now: the conditions it is navigating closely resemble its worst-case scenario, and the tools available to it are poorly matched to the problem at hand.
The core of Kobeissi’s argument is structural. The Fed’s primary instrument — interest rate policy — operates on the demand side of the economy. It can make borrowing more expensive, cool consumer spending and slow the pace at which price pressures build from within the economy. What it cannot do is address the supply side directly. When inflation is being driven by energy prices, geopolitical disruptions or constrained production capacity, the Fed is left fighting a fire with equipment designed for a different kind of emergency.
The Energy Price Problem
Kobeissi highlights the sharp rise in energy prices as the central driver of the current inflationary dynamic. Oil and natural gas price increases create cost pressure that flows through virtually every sector of the economy — transportation, manufacturing, agriculture, heating — in ways that consumers feel directly and immediately.
According to his models, sustained energy price inflation at current levels could push U.S. consumer price inflation to approximately 3.5%, placing it around 150 basis points above the Federal Reserve’s long-term 2% target. Under normal conditions, an inflation reading of that magnitude would create clear pressure for tighter monetary policy and potential interest rate increases.
The current conditions are not normal.
The Labour Market Complication
The factor that transforms a difficult situation into a genuine policy trap is the state of the U.S. labour market. Kobeissi notes that despite recent monetary easing, employment conditions have not improved meaningfully. The labour market weakness that has emerged creates a constraint that works directly against the inflation-fighting toolkit.
If the Fed responds to above-target inflation by raising interest rates, the resulting tightening of credit conditions could tip an already fragile employment picture into a more serious unemployment crisis. Kobeissi’s warning is straightforward: the economy may not be in a position to absorb rate hikes without significant labour market damage.
The contrast with 2020 is instructive. When the pandemic collapsed demand, the Fed’s response — cutting rates to zero — was well-matched to the problem. Cheap credit supported an economy suffering from insufficient spending. Today’s challenge runs in the opposite direction: prices are being pushed up not by excess demand that rate hikes can suppress, but by supply constraints that monetary policy cannot resolve.
Two Scenarios, Neither Comfortable
Kobeissi frames the Fed’s current position as a choice between two difficult outcomes rather than a path to a clean resolution.
If the Fed tightens monetary policy to address above-target inflation, the risk is a meaningful rise in unemployment — potentially above 5% — in an economy where the labour market is already showing strain. If the Fed holds or eases further to protect employment, inflation could rise above 4%, particularly if geopolitical risks centred on Iran extend the duration of energy price pressure.
In Kobeissi’s assessment, at least one of these outcomes — inflation above 3.5% or unemployment above 5% — may be difficult to avoid entirely. The variable that determines which materialises, and to what degree, is largely outside the Fed’s control: the trajectory of geopolitical risk and its effect on global energy supply.
What This Means for Markets
For investors, the policy uncertainty Kobeissi describes creates a challenging environment for asset allocation. Fixed income markets are sensitive to rate expectations; equity markets to earnings and credit conditions; and commodity markets to both geopolitical risk and the dollar’s trajectory, which is itself influenced by Fed policy.
Cryptocurrencies and risk assets more broadly have historically been sensitive to shifts in monetary policy expectations. A Fed that is perceived as unable to act decisively — constrained between inflation on one side and unemployment risk on the other — may contribute to sustained volatility across asset classes as markets reprice the probability of different policy outcomes over time.
The situation Kobeissi describes is not a prediction of imminent crisis. It is a structural analysis of constraints — and an argument that the resolution to the current economic moment will require either a favourable shift in the external environment, or a tolerance for consequences that policymakers would normally work hard to avoid.
