The Federal Reserve may win the fight against inflation without causing a recession.
The US economy grew at an annualized pace of 1.4% in the first quarter of 2024, an upward revision from the 1.3% previously measured. The United States is the world’s largest economy fueled by the strongest consumers on the planet.
Nevertheless, Q1 growth was far below the 3.4% economic expansion in the previous quarter. Consumer spending, which amounts to over half of the American GDP, grew at just 1.5%, down from the original estimate of 2%.
Imports shaved 0.82% off the original Q1 GDP growth estimate, while lower inventories subtracted 0.42%.
Despite the sluggish growth, most economists expect Q2 to fare better in the face of renewed consumer spending and confidence. Although consumer confidence declined in May, it still remained pretty high compared to early 2024.
US economist at Oxford Economics Matthew Martin expects a 2% jump in the April-June period. The Federal Bank of Atlanta expects over 3% GDP growth in the current quarter.
Whatever the case, the United States will likely avoid a recession despite 23-year high interest rates. This will be a major talking point in Thursday’s presidential debate between incumbent Joe Biden and Donald Trump. Under the Biden administration, inflation dropped from 9.1% to 3.3% while the economy kept growing at pre-COVID levels.
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The question of rates
The US Federal Reserve kept interest rates at 5.25% at its June meeting. Inflation, though steadily dropping for most of 2023, has remained uncomfortably high in 2024.
From a low of 2.9% in December 2023, the US inflation hovered around the 3% mark for the first half of the year. Prices were fueled by a nevertheless powerful economy, with unemployment only barely edging up at 4% in May.
The latest economic data proves that interest rates are finally putting a toll on the American consumer, but not as much to wreck the economy entirely. Housing permits and mortgage applications are slightly declining with fewer jobs added each month. This will likely lower inflation in the coming months.
Markets now expect the Federal Reserve to slash interest rates for the first time in September. Then, another cut could follow in November or December, followed by a period of stabilization to see the effects.
The European Central Bank already cut interest rates in June. The Fed knows it can’t keep the gap between the euro and dollar interests too wide, lest create an export crisis between the two sides of the Atlantic.
A pivot in September would be a major victory for President Biden as it would mark a definite victory against inflation. A victory that could decide the outcome of the world’s most important elections.
