Growth blooms in the US economy
The American economy is blooming with new economic spring blossoms.
S&P Global Sages report on that tuesday All seven sectors of the US economy recorded increases. Corporate activity in February increased from four in January. This is the first time since April 2022 that all seven sectors have risen simultaneously.
In other words, the last time growth was so widespread across the American economic picture was right around the time. After the Federal Reserve starts raising interest rates Its benchmark interest rate has risen from nearly zero to today’s range of 5.25 to 5.50 percent. It’s been seven months since the last Fed rate hike, and whatever impact the rate hike had seems to have run its course.
We hope to see a growth story unfold that hasn’t been heard for almost two years, and that the persistent hand-wringing over suspicions will soften. “restrictive” Interest level. The American economy has proven to be much less vulnerable to rising interest rates than was generally thought.
Despite the stability of the nominal interest rate target, there are still those who argue that the fall in inflation has caused the “real interest rate,” or post-inflation rate, to rise. The problem with this view is that there is little evidence anywhere in the economy that inflation-adjusted interest rates are suppressing real activity. Businesses are investing, salaries are increasing and production is expanding.
What real evaluators get wrong
There is always an asymmetry in the concept of “real interest rate.” This is because the “real interest rate” tends to subtract some measure of inflation (usually either recent inflation, current inflation, or expected inflation) from the current nominal interest rate.However, companies do not pay the current nominal interest rate for a long period of time. They pay a mixed rate over the investment period. The “real interest rate” that is important when considering whether to invest is not today’s real interest rate, but the expected real interest rate over the long term.
So was this intertemporal real rate restrictive? Not for years. The Fed has consistently predicted that the Federal Reserve believes that: Policy interest rate falls to 2.5% It will be there in the not too distant future and in the long run. As a result, companies view current real interest rates as a temporary anomaly and not an impediment to their expansion plans.
Financial markets do the same. Yields on long-term bonds reflect the expected path of policy interest rates over time. So even when the Fed was raising interest rates, the market pushed prices higher. Actual borrowing interest rate faced by companies As if the policy rate would eventually return to just 2.5%.
Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on March 4, 2024 in New York City. (Angela Weiss/AFP via Getty Images)
In other words, they’re like twins Advanced effects that undermine the restrictiveness of monetary policy. Bond markets are discounting future interest rate cuts, and companies are investing to reduce their financing costs.There may be some room for policy interest rates suppress economic activity Considering this, the amount is very likely much smaller than most analysts expected.
A coiled spring of expectations for interest rate cuts
This also means that any indication that easing is imminent or has already begun is likely to have a much larger impact than a quarter point reduction would suggest. Businesses and bond markets see the first rate cut as the start of a “normalization” process to much lower policy levels that Fed officials expect, making current real interest rates even less relevant.
Rafael Bostic of the Atlanta Federal Reserve Board shed light on this phenomenon and revealed how executives are poised to seize the moment a rate cut materializes.
“I asked a group of business leaders if they were ready to jump on the first sign of a rate cut,” Bostic wrote in an essay posted this week on the Atlanta Fed’s website. “The answer was a resounding ‘yes’.”
As Bostic warned, this very zealous, this a built-up eagerness to take advantage of a perceived future situationcould unintentionally spark an ember of inflation and call into question the prudence of the Fed’s interest rate cuts.
“If that scenario were to play out on a large scale, it could create an explosion of new demand and reverse progress toward rebalancing supply and demand,” Bostic wrote. “That would put upward pressure on prices. I think this threat, which I refer to as “build-up euphoria,” is a new upside risk that will require scrutiny in the coming months. Masu. ”
Later this week, we’ll take a look at how the pent-up euphoria is already having an impact.Wall Street’s collective optic nerve will be fixed February salary data It will be released on Friday. In December and January, the rate continued to perform at a high volume of more than 300,000 people per month, but if there is a dramatic move to exceed the expected 180,000 people, expectations for a rate cut this summer could be disrupted. expensive.
