The US economy is in confusion about where it will head.
Growth seems to be faltering, housing sales are falling and economists warn about a possible recession ahead. But consumers continue to spend, companies continue to publish profits and the economy continues to add hundreds of thousands of jobs each month.
Among all this, prices have reached peaks of four decades, and the Federal Reserve is desperately trying to extinguish inflationary flames with higher interest rates. This makes borrowing more expensive for households and businesses.
The Fed hopes to achieve the triple axel of the central bank: slow down the economy just enough to slow down inflation without causing a recession. Many economists doubt that the Fed can manage this feat, a so-called soft landing.
Increased inflation is usually a side effect of a hot economy, not the current warm pace of growth. Today’s economic moment evokes dark memories of the 1970s, when blistering inflation coexisted, in a kind of toxic beer, with slow growth. It made a new ugly term: Stagflation.
The US is far from that level. Although growth seems shaky, the labor market still looks quite strong. And consumers, whose expenses contribute almost 70% of economic output, are still spending, even at slower speeds.
The Fed and Economic forecasters are, therefore, trapped in unexplored territory. They have no experience in analyzing the economic damage of a world pandemic. So far, the results have been humiliating. They did not anticipate the flamboyant resumption of the economy of the 2020 recession – or the unleashed inflation that it triggered.
Read also: THE US IS NOT HEADING TOWARDS A RECESSION, Biden.
Even after inflation accelerated in the spring of last year, Fed Chair Jerome Powell and many other fortune tellers underestimated the price surge as a “temporary” consequence of the supply congestion that will soon fade.
The US Economy is in Confusion