Eyes on the US Economy

At the time of writing, the United States (US) stock market had fallen sharply after the head of its central bank – the Federal Reserve (Fed), announced that interest rates were likely to rise higher than previously forecast. Higher interest rates are seen as key to fighting inflation – the rate at which prices rise. The Fed Chairman, Jerome Powell, was at the time testifying before the US Senate.

The US economy is in a sort of Jekyll and Hyde mode at the moment. On the one hand, according to the World Economic Forum (WEF), the economy has made an impressive recovery after COVID-19. Statista reports that the US economy as a whole has returned to its pre-pandemic growth trajectory, with real GDP growing 2.1% in 2022.

However, on the other hand, inflation has remained problematic. In January this year, US inflation was measured at 6.4%. While this was down from the 40-year peak of 9.1% last June, it remained well above the 2% mark that the Fed considers to be healthy.

Powell testified that the Fed could lift rates above the 5% to 5.5% officials had forecast last December. According to Natalie Sherman, Business reporter for the British Broadcasting Corporation (BBC), by raising borrowing costs, Fed officials are hoping to reduce demand for loans for business expansions, homes and other purchases.

Ultimately, the aim of raising interest rates is to cool the economy and ease the conditions which are causing prices to increase. However, the danger is that such moves could harm certain sectors, and generally lead to higher unemployment. While the US labour market appears strong for now, Fed rate hikes have already led to sharp downturns in sectors such as the housing market.

Therefore, in trying to fix one problem – inflation, the Fed could also create a multitude of other problems. Since the US remains the world’s largest economy, there are also spill over risks to other countries, especially America’s trading partners, and countries and companies that use its financial markets.

The other issue to pay attention to in the US is its debt ceiling. The debt ceiling is the legal cap that the US Congress places on the amount that the Treasury can borrow. The Treasury cannot borrow above the ceiling unless Congress increases the borrowing limit. Without such an increase, the US will not be able to pay its debt, resulting in a default.

Should Congress fail to raise the debt ceiling, experts say that the US could default on its debts as soon as this summer. Thankfully, the US has never defaulted on its debts. However, the extent of political polarisation in its Congress means that this cannot be taken for granted.

At a time when the world is still reeling from poly crisis of geopolitical tensions, food insecurity, climate-related risks and the cost-of-living crisis, political brinksmanship over the US debt ceiling is an unwelcome development. Should the US actually default on its debt, as Powell recently told Congress, it would result in “extraordinarily adverse” damage to the global economy.

In 2011, the last time Congress engaged in a prolonged battle over the nation’s debt ceiling, markets and the broader economy were not left unscathed. Alicia Wallace, a senior business writer for CNN, notes that financial markets were roiled, consumer confidence weakened, the US economic policy uncertainty index set a new high and Standard & Poor’s credit rating agency downgraded the country to AA+ from AAA.

The US economy perhaps still offers a bright spot for the global economy. Over the next two weeks, the government intends to release new data on labour market turnover, jobless claims, employment growth, consumer and wholesale inflation, and retail sales. These results will provide a litmus test for the health of the US economy which it would hopefully pass for the good of the global economy.

Joel K Richards is a Vincentian national living and working in Europe in the field of international trade and development.
Email: joelkmrichards@gmail.com