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IPFS News Link • Economic Theory

Asia starting to feel like 1997-98 all over again


Last month, former US Treasury Secretary Lawrence Summers drew chuckles when he said the Federal Reserve's next action might be to tighten, not ease, interest rates. Few bond traders are laughing now.

The odds are still low that Fed Chairman Jerome Powell's team will raise borrowing costs anytime soon. But near-universal earlier expectations in Asia were that the US central bank would be easing between five and seven times this year.

Such bets are going awry as US inflation remains stubbornly high. It rose at a 3.4% rate in April year on year. Though far below the 9.1% peak in mid-2022, inflation is still too far away from the Fed's 2% target for comfort.

This week, Goldman Sachs CEO David Solomon said he doubts the Fed will cut rates in 2024. "I still don't see the data that's compelling to see we're going to cut rates here," he said at a Boston College event.

At the same time, Solomon noted, persistently high inflation is squeezing American households. He cited recent earnings shortfalls at companies from McDonald's Corp to AutoZone Inc to make the case that high prices are hitting consumption.

"If you're talking to CEOs that are running businesses that really deal with what I'll call the middle of the American economy, those businesses have been starting to see change in consumer behaviors," Solomon said. "Inflation is not just nominal. It's cumulative, and so everything is more expensive. You're starting to see the consumer, the average American, feel this."

The Fed, though, won't see these dynamics as a reason to slash borrowing costs significantly, at least not this year. Stagflation is a live risk as oil prices surge amid rising turmoil in the Middle East. The risk rises if the US Congress doesn't act boldly to increase productivity and competitiveness.

As JPMorgan Chase CEO Jamie Dimon tells the Wall Street Journal, America "looks more like the 1970s than we've seen before. Things looked pretty rosy in 1972. They were not rosy in 1973."