The "Federal Reserve rate cut" that has been the talk of the town since the end of last year is likely to be postponed again, or even shelved, while at the same time, the U.S. economy is also facing the risk of a hard landing.
The inflation crisis is here! Is the Fed delaying the rate cut?
According to general economic principles, an inflation crisis and economic recession rarely occur simultaneously in the same economy. However, based on the current situation, the U.S. may be on the verge of a "stagflation" crisis.
Today, let's discuss the latest situation of the U.S. economy and see where the Fed's rate cut has reached. Why is the U.S. economy facing a "hard landing" again?
Delay in rate cut timing? The Fed slapping its own face?
Since 2022, the Fed's monetary policy has been leaning towards a tight interest rate hike policy, with the U.S. federal funds rate continuously rising and ultimately remaining at a high interest rate level of 5.25% - 5% for a long period.
With the arrival of October last year, there were changes in various U.S. economic and inflation data. The Fed believed that the inflation crisis was completely controllable. As a result, Fed Chairman Powell hinted at a rate cut in December, indicating that a rate cut would be used to stimulate the U.S. economy to make it better, and the Biden administration could also deal with the 2024 election.
In December last year, Powell hinted at a rate cut on multiple occasions.
However, unexpectedly, in January, the U.S. released GDP growth data for 2023 that greatly exceeded expectations, and employment and consumption data did not show signs of a hard landing. Therefore, Fed Chairman Powell stated that within the Fed, they were already considering the rate cut issue in March.
At that time, the market predicted that the probability of a rate cut in March was around 50%, or even higher, because the U.S. economic data at the time supported this approach.However, it was unexpected that with the release of the CPI and PPI data for January, we were surprised to find that the inflation crisis in the United States has not been resolved. The inflation situation in the U.S. service industry remains very severe, and even more extreme situations have emerged.
The U.S. CPI data for January increased by 3.1% year-on-year, higher than the market expectation of 2.9%, and the core CPI index also increased by 3.9% year-on-year, exceeding the previous market expectation of 3.7%. Moreover, the CPI index also showed a month-on-month increase, at a very rapid pace.
The U.S. PPI index for January rose, significantly exceeding expectations.
Next came the subsequent release of the PPI index. The January PPI index, also known as the producer price index, increased by 0.3% month-on-month, and the core PPI index increased by 0.5% month-on-month, both exceeding market expectations.
Despite subsequent statements from high-ranking Federal Reserve officials that the inflation data exceeding expectations will not hinder the Federal Reserve's interest rate cut plan, the market does not give you face, after all, economic data is the most effective basis for decision-making.
According to today's latest data, according to the CME Federal Reserve Watch data, the probability of the United States not cutting interest rates in March has already reached as high as 90%, and the probability of cutting interest rates by 25 basis points is only about 10%.
The probability of the Federal Reserve cutting interest rates continues to decline.
Not only that, but the probability of cutting interest rates in May is also less than 40%, and the timing of the interest rate cut has been further postponed to around June.
If delaying the interest rate cut is acceptable, what's worse is that former U.S. Treasury Secretary and the "whistleblower" of the U.S. inflation crisis, Summers, stated that the Federal Reserve's next step is "very likely to be raising interest rates, not lowering them," with the probability of the Federal Reserve raising interest rates at 15%.
Why is that the case?In simple terms, whether it's the Red Sea crisis, the ongoing closure of global supply chains, or the soft landing of US economic data, all contribute to making US inflation more severe. Maintaining the current federal funds rate of 5.5% is already very difficult to bring US inflation back below 2%.
The Red Sea crisis affects global inflation, which is why Summers has expressed the need to be vigilant about the risks of the Federal Reserve raising interest rates, a view shared by several Wall Street investment banks.
Be vigilant about the "stagflation" crisis? Is the US economy about to enter a recession?
It is clear that the current inflation crisis in the United States has not ended, leading to a continuous delay in expectations for US interest rate cuts. Moreover, the seemingly excellent economic data in the United States actually hides hidden concerns. This inevitably raises concerns about the arrival of a "stagflation" crisis in the United States!
As we all know, the US manufacturing industry has been in a slump, falling into a recession that has lasted for more than a year. The US manufacturing index has been below 50% for many years, which simply means continuous decline. Therefore, the US economy is basically supported by consumer data and service industry data.
However, the retail data for January was very poor. The monthly growth rate of US retail sales in January was -0.8%, with the previous value being 0.6%. This decline is very large and lower than the expected -0.1%, setting the largest decline since March 2023.
The sharp decline in US retail data in January
The sharp decline in retail data means that the momentum of US economic growth has serious problems, which means that the US economy in January will not be very good, and the claim that the US economy has "soft landed" has been broken.
Therefore, on the one hand, the inflation crisis in the United States has not ended, and on the other hand, the sudden decline in the seemingly good US economy and consumer data indicates that the family savings accumulated during the epidemic in the United States are being exhausted.So, despite the lack of obvious signs of recession in the U.S. economy, American economists generally believe that the U.S. economy will experience a significant slowdown in the coming months. If we superimpose these two trends, we can see that the U.S. economy indeed performed quite well in 2023. However, as I analyzed before, the "outstanding performance" of the U.S. economy is actually the result of continuously issuing U.S. Treasury bonds, built up by debt. If the U.S. is not allowed to issue debt to stimulate the economy, then the U.S. economy will inevitably be in recession.
The scale of U.S. debt has already broken through to 34 trillion U.S. dollars.
Therefore, when inflation data reverses and U.S. consumer data declines, the U.S. economy is likely to face the result of an inflation crisis + economic recession in the short term.
And if the Federal Reserve and the Treasury Department do not take more effective measures, then the U.S. economy is likely to face the crisis of "stagflation."
Summary
Overall, although the current U.S. economy is performing well, various hidden concerns have begun to emerge after entering 2024.
Firstly, the CPI and PPI indices surged in January, which means that the U.S. economy has not completely won the "inflation defense war." The situation of U.S. inflation is still severe, which forces the Federal Reserve to temporarily slow down interest rate cuts and may even raise interest rates again to deal with the severe inflation situation.
Secondly, the retail data for January has also been released, and the overall performance cannot be said to be very bad, it can only be said to be worse than bad. Because the decline in retail data indicates that Americans are "out of money to consume," because from the data of the second half of last year, as long as there is money to consume, Americans are even willing to use credit cards to borrow money to consume.
Therefore, if the Federal Reserve lowers interest rates, then the U.S. inflation data will not agree; and if it chooses to raise interest rates, then the U.S. economy may not be able to hold on. This is the dilemma that must be faced when facing the "stagflation crisis."Of course, historically speaking, the Federal Reserve has either chosen the "procrastination strategy" when dealing with similar matters, continuing to maintain the current interest rates and observing for a while longer, or it has opted to raise interest rates, directly suppressing inflation first before addressing the United States' recession.
So, facing this dilemma, how will Federal Reserve Chairman Powell make his decision? We will need to continue to follow the situation closely.