Strength of U.S. Economy Reads Like a Fairy Tale Story

Contrary to widespread predictions of a “recession at the start of 2023, right up to underestimating growth at the end of the year,” the 4th quarter “growth figures were incredible,” while updated figures from the core personal consumption expenditures index — the Federal Reserve’s preferred measure — add more color to the picture.” However, this scenario doesn’t follow historical trends and presents what has been described as a “conundrum” for the Fed. Typically, “a cycle usually works through the following steps—the economy gets too hot, inflation accelerates, and the Fed raises interest rates. Then the economy cools down, perhaps even contracting. And only after that is inflation brought back under control.” Yet despite facing the “biggest and fastest increase in interest rates in a generation,” the economy hasn’t crashed, and consumers are still spending, and unemployment remains low. Looking at the global picture, the rest of the world has not faired as well, “Europe is on the brink of a recession and inflation is still higher. Japan is still struggling to escape deflation, with the latest inflation numbers coming in lower than expected. China’s economy is feeble and requires more stimulus.” It is anticipated that the Fed will be more reluctant to start cutting interest rates than Wall Street expects, since it’s too soon to know what level of impact the interest rate hikes have had on lowering inflation because “monetary policy works with a lag” and “smoother supply chains and lower energy costs have done the heavy lifting.”