American growth can be a global boon, but inflation could derail the train

WASHINGTON – US economic growth, which continues to perform above potential, is emerging as a key pillar for continued global expansion, but also has spillover effects persistently high Inflation and tight monetary policy in the world’s largest economy could pose new risks to a hoped-for “soft landing” around the world.

As global financial leaders are meeting in Washington this week spring At the meetings of the International Monetary Fund and the World Bank, the outlook for the world’s near-term economic fortunes could focus on whether the U.S.’s surprise success is driven more by constructive forces such as increased labor supply and productivity, or through excessive budget deficits that continue to fuel demand and possibly inflation.

One answer supports some Chicago Federal Reserve President Austan Goolsbee has labeled a “golden path” where strong growth and falling inflation coexist, not only in the US but also in other countries linked to it through exchange rates and trade channels that have kept imports at record levels. The other could point to a bumpy ride if the Fed concludes that U.S. demand remains too strong for inflation to fall and decides it must delay expected inflation. interest cutting interest rates or – in extreme cases – resorting to rate hikes that had virtually taken it off the table.

Recent data hasn’t helped: inflation remained well above the US central bank’s 2% target for the first quarter of the year, while gross domestic product is still above potential at 2.4% for the first quarter . the period January-MarchAccording to an Atlanta Fed tracker, Fed officials are keeping their words under wraps about when rate cuts could begin.

“We’re not yet where we want to be on inflation,” said Thomas Barkin, president of the Richmond Fed last weekcapping a seven-day period in which U.S. jobs data showed companies hiring an additional worker 303,000 employees two to three times the estimated non-inflationary pace in March, and new inflation data further reversed the trends Fed policymakers relied on last year to move toward rate cuts in 2024. inflation expectationsclosely monitored by the Fed, also indicates that progress has stalled.

The data quickly registered in markets lowering prospects for monetary easing by the Fed, something global officials have no doubt noted ahead of discussions this week that could focus on whether the post-pandemic bout of inflation and tight monetary policy in the world is coming to an end, or simply suspended until it is clear what is happening in the US

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The IMFs The latest World Economic Outlook summary of the global economy will be published on Tuesday.

But recent US data has already had consequences.

Although the European Central Bank has kept its rate cut and inflation in place prospects intact for the time being, Press conference of ECB President Christine Lagarde on Thursday was dominated by questions about how far along the eurozone is monetary policy may differ that of the Fed if US inflation persists. Other central bankers were more explicit that a protracted inflation battle in the US would limit their options.

“It’s not just about whether the Fed can decide to act in June or a little later; the entire monetary policy for perhaps a year is in question,” According to Jansson, deputy governor of the Swedish Riksbank, told reporters, adding that there was “no chance” the Fed would have to discuss whether further hikes are necessary on loan costs are necessary.

That’s not the basis. This was evident from the Fed’s latest round of economic projections, issued in March none of his Policymakers expected the US central bank to raise overnight rates above the current range of 5.25%-5.50%, where they have been since July.

But a wedge also crept in, with minutes from the Fed March 19-20 policy meeting It shows that “some participants” said that overall financial conditions may not be as tight as suspected, “which could boost aggregate demand and put upward pressure on inflation,” the kind of dynamic that, if persistent, could argue for higher interest rates.

The strong growth in the face of the highest policy rates in a quarter century has raised a series of questions for the Fed – and by extension the global economy – about whether the impact of monetary policy will be felt only slowly, with a American nosedive is coming, whether aspects of the economy such as labor force participation and productivity have changed for the better.

INCREASED RISKS

The United States Congressional Budget Office recently raised its outlook for potential economic growth in the US based on increased immigration and labor productivity, factors that would allow the economy to grow without causing inflation.

While Fed officials have acknowledged that both forces helped slow the pace of price increases surprisingly quickly last year — setting the stage for what some have called a “flawless disinflation” — it is unclear how deep that goes. go.

If the economy is determined to remain too strong and financial conditions too loose for a full return of inflation to the Fed’s target, the US divergence now helping to lift the world could turn into a money squeeze.

“I think the Fed is in hold mode,” with perhaps just a single rate quarter percentage point interest rate cut this year, said Karen Dynan, a professor at Harvard University and non-resident senior fellow at the Peterson Institute for International Economics.

While she expects tighter policy will “eliminate” demand and slow the US economy, worse outcomes cannot be ignored as long as the inflation problem persists.

“It’s really a ‘soft landing’ forecast… but I do think the risks of a recession are somewhat elevated in the United States and other countries,” she said. – Reuters