Main Edition
US
FR
August 14, 2024 - 3:30pm
If the Goldilocks metaphor is used to describe the ideal economy — inflation not too hot and employment that’s not too cold, allowing interest rates to stay low and thus support continued growth — what metaphor do we use for its opposite? Because that’s what seems to prevail now in the United States: an economy that seems to be cooling fast but in which inflation still remains too hot, putting the Federal Reserve in a bit of a pickle.
Today’s Consumer Price Index showed that inflation was getting close to the Fed’s 2% target, but isn’t there yet. Annual inflation has fallen to 2.9%, the lowest since 2021, but recent months have seen growing signs that the US economy is slowing: slower job creation, softer wage growth, rising arrears in credit, greater pessimism among consumers. Add to that the sharp fall from inflation’s peak two years ago and investors are clamoring for the Federal Reserve to start cutting interest rates soon, lest the economy sink into recession. Indeed, some economists are now saying that the US economy has already begun contracting.
But that isn’t yet clear. Although last month’s job figures were soft, they may also have been distorted by the impact of Hurricane Beryl. While employers appear to be scaling back their hiring plans, high-frequency data, like air travel and flight bookings, suggest the economy may still be growing. Although there’s no question it’s growing more slowly, it’s also coming off a period of very hot expansion, so there’s scope for cooling without it actually going into reverse. Overall, the picture we are getting still appears to be of a gradual easing, not an imminent collapse.
That would still be reason enough for the Federal Reserve to start cutting interest rates, easing up on the brakes before the vehicle came to a complete halt, were it not for one thing: the engine still seems too hot. Recent inflation reports have shown a continued decline in the rate of inflation, but the decline is itself too slow for comfort.
Last month’s Producer Price Index reading came in lower than expected, but the core rate over the last year remained above 3%. As of today, that remains largely unchanged. While consumer expectations of inflation appear to have come down to a level at which the Fed could comfortably cut rates, business surveys paint a somewhat different picture: although wage growth is cooling and employment is softening, managers are still worried that inflation will continue to cut their profit margins.
That appears to be the real reason for the anxiety we’re hearing from investors — not that the sky is falling, but that their profits are. In truth, stock and bond markets are looking a bit like a football player who writhes in agony from a tackle only to miraculously recover as soon as the offender is yellow-carded. Markets, and their talking heads on the business channels, scream that only immediate and sharp rate cuts will save the economy from implosion; then they rally sharply as soon as soft data suggests rate cuts are coming. As a result the indices are still flirting with record highs, something which would seem not to square with an economy that’s going south.
Join the discussion
Join like minded readers that support our journalism by becoming a paid subscriber
To join the discussion in the comments, become a paid subscriber.
Join like minded readers that support our journalism, read unlimited articles and enjoy other subscriber-only benefits.
Subscribe