Is the U.S. economy already weaker than the headline data suggests and should the U.S. Federal Reserve already be easing?
In the U.S. recent data (Friday 30th August 2024) showed the personal consumption expenditures (PCE) price index, the Federal Reserve’s favored measure of inflation, ticked up 0.2% last month, as expected. The data seems to back a smaller rate cut.
The question of whether the economy is weaker than headline data suggests and if the U.S. Federal Reserve should already be easing is complex.
The gross domestic product (GDP) increased at an annual rate of 3% in Q2 of 2024, which is a positive indicator. However, the U.S. current-account deficit widened, and personal income and outlays show mixed signals with a slight increase in personal income but a higher increase in personal outlays.
Inflation remains above the Federal Reserve’s 2% target but well below the pandemic-era peak. These factors suggest that while there are positive aspects to the U.S. economy, there are also challenges that may warrant caution from the Federal Reserve.
Is the market too focused on forecasting the size of any possible upcoming cut? “The question no one has asked yet is why is the policy rate is still at 5.5% when inflation is down to almost 2.5%? It would most likely be an error to do a ‘bigger’ rate cut in this kind of environment with all the uncertainty that the U.S. economy is facing.
Jobs data trends are also an important factor and play a major role in decision making. Company performance and future performance predictions are critical to help judge policy direction.
Decisions on monetary policy easing would be based on a comprehensive analysis of all economic indicators and trends.
If the FED go BIG on a rate cut some say it could be very dangerous and spook the markets.
