Where is the US economy heading?

“Central banks are winning the battle against inflation,” says The Economist, “but the war is just getting started.” US inflation has fallen swiftly from 9.1% two years ago to 3% last month. But a return to the low-inflation world that preceded Covid is unlikely. 

Donald Trump’s promise of 10% across-the-board tariffs if he re-takes the White House will send a new inflationary shock through the world economy, while green investment and climate change are keeping commodity prices high. 

Recent US inflation data undershot forecasts, reassuring economists that the country is well on the way to the 2% target. 

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US economy and unemployment

Some have begun to fret that unemployment could be a bigger menace than inflation, says Matt Egan on CNN. Unemployment has ticked up to 4.1% and has risen for three months in a row, a “yellow” light that tight monetary policy is starting to hurt the US economy. Unless it begins to cut rates soon, the US Federal Reserve risks “injecting inflation-fighting medicine into an economy that no longer needs it”.

US rate cuts

A first US rate cut is expected in September, but one wonders why the Fed should wait, adds Aaron Back in The Wall Street Journal. Recent weeks have brought a succession of “warnings from consumer-facing companies that American shoppers are tightening their belts."

Just a few months ago some Fed officials were hinting that the US economy was so robust that they might not cut rates at all this year, says Edward Harrison on Bloomberg. 

But recent data suggests “the US is much closer to a recession than anyone thought”. Markets have thus almost gone back to where they were at the start of the year – predicting two to three quarter-point US rate cuts before the end of 2024. The prospect of easier money will support US stocks.

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