U.S. economy under tightening expectations: Struggling and wandering

Shoppers at a supermarket in California, US, April 12, 2022.  /CFP

Shoppers at a supermarket in California, US, April 12, 2022. /CFP

Shoppers at a supermarket in California, US, April 12, 2022. /CFP

Editor’s Note: Guo Lihua is a professor at the School of Economics, Central University for Nationalities. Articles reflect the views of the author and not necessarily those of CGTN.


Although the Fed is on an interest rate hike cycle from March 2022, US CPI hit a forty-year high of 9.1 percent in June 2022 and fell to 7.7 percent in October, but inflation is still running high.

The reasons for this round of inflation are more about “supply-driven” characteristics. Under the impact of the Russia-Ukraine war on international commodity and other energy prices, the price of key commodities such as automobiles and other international supply chain disruptions has increased the cost of imports; The rapid recovery of the service sector in the late pandemic has widened the labor market gap, creating a “spiral between wages and commodity prices”, simultaneously fueling the formation of cost-push inflation.

Currently, with several rounds of large-scale fiscal stimulus, the dominant factor in inflation has gradually shifted from the supply side to the demand side, and the symptoms of demand-pull inflation have gradually emerged.

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Since early March, the Federal Reserve has initiated the fastest rate hike since 1980 to combat inflation. As of November, the Fed has raised rates by a cumulative 375 basis points (bp) since March. And the federal funds rate has been raised from 3.75 to 4 percent.

The impact of the rate hike is obvious, and it is not a good time for the common man. The Philadelphia Fed manufacturing employment index fell to 7.1 percent in November from 28.1 percent earlier, indicating the labor market is cooling rapidly. In September, total personal savings in the US fell 59.29 percent year-over-year and have been growing negatively for 18 months in a row.

However, as interest rates increase in advance and mortgage rates, the pressure on the general public to pay variable mortgage rates increases. As evidenced by the income and expenditure situation, the first quarter of 2023 may see a more significant slowdown in consumption.

Investment indicators are not good either, in the third quarter of 2022, US construction investment and residential investment growth rates have dropped to -11.36 percent and -12.74 percent, respectively. Although US GDP rose from negative to positive territory in the third quarter due to a net export drive, a slowdown in personal consumption, real estate and other industries, a decline in investment and an economic slowdown were inevitable in a high interest rate environment.

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Fed Chairman Jerome Powell / VCG

Fed Chairman Jerome Powell / VCG

Fed Chairman Jerome Powell / VCG

In terms of the external environment, the world economy is facing several challenges, including the ongoing Covid-19 pandemic. The regional situation is volatile, the financial environment is deteriorating, and countries are going through difficult times. On October 11, the IMF released its World Economic Outlook report, forecasting that global economic growth will decline by 0.2 percent from the July forecast to 2.7 percent in 2023. Against the backdrop of a global recession, the US is not alone.

It is still too early to conclude that the US is about to enter a deep recession. On November 16, US Department of Commerce data showed that adjusted retail sales rose 1.27 percent in October from a year earlier, the highest level since February this year.

On August 16, the US Congress passed the Inflation Reduction Act, which allocates funds for energy security and climate investments, as well as subsidies for the Affordable Care Act, which could restructure industry through government spending and pave the way for an economic recovery.

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For some time to come, tightening expectations may be appropriate, but the exact means are worth discussing. Subsequent sharp interest rate hikes have had little impact, but composite CPI growth in October was still at a high of 7.7 percent, still some way from the Fed’s regulatory target of a 2 percent rate for inflation. The issue of inflation is still the main decision base of the current Fed.

During the Fed’s interest rate resolution meeting in early November, Fed Chairman Jerome Powell called for tightening policy until the inflation target is reached. Faced with all such uncertainties, it is doubtful that the US chooses to continue raising interest rates. Amid the slowdown in rate hikes, tighter monetary and fiscal policy may be the next step.

(If you want to contribute and have specific expertise, please contact us at [email protected] Follow @thouse_opinions (on Twitter to find the latest commentary on the CGTN Opinion section.)


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