**Recession Cancelled, But Fed Keeps Strangling**
*Based on analysis by Joseph Trevisani, FXStreet*
The global financial outlook for 2024 continues to be shaped by nuanced and sometimes contradictory data. One of the strongest narratives emerging from the US has been the considerable resilience of the American economy in the face of historic Federal Reserve tightening. With expectations of an imminent recession repeatedly failing to materialize, the question dominating markets is whether the Fed’s high-rate regime is stifling long-term growth even as headline numbers look robust.
This analysis, based on Joseph Trevisani’s original article for FXStreet, delves deeply into the interplay between Federal Reserve policy, economic performance, labor market evolution, and the implications for the US dollar and global foreign exchange trends.
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### The Recession That Wasn’t
Over the past two years, forecasts of a US recession have been pervasive. Traditional economic models, referencing cycles of monetary tightening like the current one, predicted a downturn as borrowing costs surged and liquidity flows contracted.
However, the official statistics tell a markedly different story:
– **GDP Growth**: US GDP expanded 2.5 percent in 2023, outpacing the pre-pandemic trend and surpassing most developed peers. Initial 2024 figures remain positive, defying gloomy predictions.
– **Labor Market Resilience**: Unemployment remains under 4 percent, with job creation consistently beating consensus estimates.
– **Consumer Spending**: Retail sales and services remain buoyant, despite mounting concerns about credit card debt and rapidly rising costs.
While growth has slightly moderated compared to the post-pandemic boom, the dreaded recession has simply not materialized. Analysts cite a combination of pent-up consumer demand, government fiscal stimulus, and the robust performance of key private sector segments, especially technology and services.
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### Federal Reserve Policy: Treading a Delicate Balance
To understand the broader consequences for the dollar and financial markets, it is essential to analyze the Federal Reserve’s dual mandate and how current policy is shaping the landscape.
#### Rate Hikes and Their Aftermath
– The Federal Reserve embarked on its fastest tightening cycle in decades, raising the Federal Funds Rate from near zero to over 5 percent between 2022 and 2023.
– This move was designed to tamp down inflation, which had surged to a four-decade high in the aftermath of Covid-era disruptions and supply chain shocks.
– While headline inflation has come off its peak, underlying core inflation readings remain stubbornly above the Federal Reserve’s 2 percent target.
#### Impact on Lending and Investment
– Higher rates have made both consumer and business borrowing more expensive.
– Mortgage applications have plunged, weighing on the historically crucial housing sector.
– Business investment, especially in rate-sensitive sectors like real estate, has slowed, but technology and advanced manufacturing have offset some of this weakness.
#### The Credibility Factor
The Fed’s credibility is on the line. Having mischaracterized early inflation as “transitory,” policymakers are now wary of loosening too early and reigniting price pressures. Jerome Powell, the Fed Chair, has insisted on the necessity of “sufficiently restrictive” policy until inflation is well under control.
This has produced a paradox: while inflation-adjusted wages are rising and growth remains firm, financial conditions are tight enough to potentially strangle investment and spur latent vulnerabilities in the credit-sensitive sectors of the economy.
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### Why the US Economy Stayed Strong
Several factors help explain the disconnect between policy tightening and actual economic outcomes:
– **Household Wealth Cushion**: Households accumulated trillions in additional savings during the pandemic, serving as a buffer against rising costs.
– **Resilient Corporate Margins**: Many US corporations maintained or even expanded profit margins by passing costs onto consumers, especially in monopolistic or oligopolistic industry segments.
– **Government Spending**: Fiscal stimulus, most notably the Biden administration’s infrastructure and clean energy initiatives, supported jobs and industrial activity.
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