The Fear of Stagflation: US Economy Faces Uncertainty in First Quarter

International

Entered 2024.04.26 18:23 Modified 2024.04.26 20:00 Paper A3

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Photo = Getty Image Bank The US financial market was shaken by the economic growth rate and price shock in the first quarter of this year. This is because concerns about ‘stagflation’ (a rise in prices during an economic downturn) have arisen as sluggish growth is coupled with unpredictable price indicators.

The interest rate on US Treasury two-year maturity bonds was more than 5% per annum during intraday trading on the 25th (local time), reaching the highest level since November last year. At one point on this day, it rose to 5.027% per annum, but then fluctuated around the 5% level. The interest rate on 10-year US Treasury bonds also exceeded 4.7% per annum for the first time this year, rising to 4.72% per annum. The New York stock market fell all at once. The Dow Jones Index closed trading at 38,085.80, down 375.12 points (0.98%) from the previous day. It plunged more than 6% points at the beginning of the market, but later the decline eased. The S&P 500 index closed at 5,048.42, down 23.21 points (0.46%), and the NASDAQ closed at 15,611.76, down 100.99 points (0.64%).

Real gross domestic product (GDP) and personal consumption expenditure (PCE) price index results for the first quarter of this year, published before the market opened on this day, hit the market. The GDP growth rate was calculated to be 1.6% annually, well below the market forecast (2.4%), while the increase rate of the PCE core price index (excluding food and energy) was 3.7%, more than forecast (3.4 %). .

Disappointment spread through the market that inflation continued to rise amid the economic slowdown, making it harder for the US Central Bank (Fed) to cut interest rates. According to FedWatch from the Chicago Mercantile Exchange (CME), the federal funds rate futures market reduced the possibility of a base rate cut in June from 16.5% the previous day to 11.5% today.

The US economy ran on debt… Are we headed for 1970s style stagflation?
US first quarter growth rate and inflation ‘shock’… Is the ‘Goldilocks Economy’ going mad?

The US economy, where ‘soft landing’ (soft landing of the economy) and ‘no landing’ (boom without recession) was discussed, was suddenly engulfed in a sense of stagflation (prices rising amid economic slowdown). This is because the growth rate in the first quarter has slowed down, falling well below market expectations, while prices remain high and remain unresolved. As some in the market even mentioned the ‘nightmare’ of the 1970s when the oil shock and the economic recession coincided, the actions of the US government became more urgent, with US Treasury Secretary Janet Yellen personally take steps to eliminate the situation.

○ Expectations of interest rate cuts fading

As for the announcement of the results of the US first quarter gross domestic product (GDP) and personal consumption expenditure (PCE) on the 25th (local time), market experts responded that it was “unexpected.” “The US economy has been growing at a faster-than-expected rate recently, so this report is clearly unexpected,” said Matthew Ryan, head of market strategy at financial services firm Every. Mike Reynolds, vice president of investment strategy at asset management firm Glenmed, said, “Until recently this year, there was a lot of talk about ‘Goldilocks’ (the economy is in the right state, it’s not overheating or cooling)” I believe so,” he said. According to FedWatch from the Chicago Mercantile Exchange (CME) on this day, the federal funds rate futures market increased the probability that the US Central Bank (Fed) will not cut interest rates by the end of the year from 0.7% a month ago to 18.8%. In relation to this, the Wall Street Journal (WSJ) reported, “The dream of the US central bank (Fed) to lower interest rates is disappearing.” WSJ published an analysis late last year showing that market expectations for an interest rate cut are affecting inflation.The interpretation is that the rise in the New York stock market may have driven up prices in the financial services sector .Because of this, it has been pointed out that the Fed could be repeating the mistakes of the 1970s.

Fed Chairman Jerome Powell ignited the New York stock market rally by saying, “The Fed has begun to discuss the appropriate time to cut interest rates” immediately after the regular meeting of the Federal Open Market Committee (FOMC) in December of last year. However, as the US March consumer price index (CPI) and retail sales showed stronger-than-expected results, the hawkish government only said last week, “It will likely take longer than the expectation to become more confident that inflation will fall to 2%. ” make a statement.

○ Unreasonable fiscal policy ‘headwind’

Some note that US President Joe Biden has fueled inflation with a policy focused on fiscal expansion. Since taking office, President Biden has begun actively stimulating the economy through the use of funding such as the Semiconductor Act, the Inflation Reduction Act (IRA), and student loan forgiveness. WSJ analyzed that “excessive issuance of government bonds has led to a rise in government bond yields and a strong dollar,” and that “the rapid expansion of the trade deficit has affected the slowdown in GDP growth.” Looking at the details of the GDP growth rate, the export growth rate in the first quarter compared to the previous quarter was 0.9%, a sharp drop from 5.1% at the end of last year. Import growth rate increased from 2.2% to 7.2%.

The US government is increasing the issuance of government bonds to pay for massive financial spending. In the first quarter of this year, the amount issued in government bonds was $7.2 trillion, a quarterly record high. “The fiscal deficit is as high as 6% of GDP,” said Jamie Dimon, CEO of JP Morgan “This is driving much of the growth, but contrary to people’s expectations, it will have a different result in the form of inflation . “

As market concerns grew, Secretary Yellen took immediate action to defuse the situation. He said, “The US economy remains very strong,” and predicted, “Once more data is collected, the indicator (GDP) will be revised higher (in provisional or adjusted values confirm).” Regarding the fact that the inflation rate in the first quarter did not fall as much as expected at 3.4%, Secretary Yellen also said, “The fundamentals of the US economy show that inflation is falling to normal levels.”

New York = Park Reporter Shin-young nyusos@hankyung.com

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