“I am absolutely convinced that the Fed is late in cutting rates. They were supposed to start in May. But fortunately this delay will not cause serious damage: no well-run company will fail if borrowing costs remain 50 basis points higher for three months longer than they should have.” Paul Donovan, chief economist at UBS GWM, has no doubt: if the ECB and the Bank of England are doing well, in his view, the Fed has wasted too much time instead. “In my view, Fed Chairman Jerome Powell is not doing a good job,” he comments. “To say that the Fed relies on data to make its decisions, at a time when macroeconomic data is proving unreliable and subject to strong revisions, is not wise.”
Does the fact that the Fed is late threaten to jeopardize the stability of the US economy?
No, I don’t think so. The economic data gives every indication that the US economy is headed for a soft landing, not a recession. Retail sales are strong, the latest employment data suggests the economy is creating jobs, and profits are rising. Only sentiment indicators (such as consumer confidence) are weak. But let’s not forget that these indicators are heavily influenced by the political views of the people we interview. They are not that reliable.
However, it is true that consumption has remained stable so far thanks to the savings that households have accumulated during the pandemic. Today these savings have become illusory: is there not a risk that consumption will slow down rapidly?
True, these extra savings are no longer able to support the American economy. But for middle-class families, there is now a different support: after years of high inflation, real wages are finally starting to grow again. This does not fully compensate for the end of the extra savings during the pandemic—the economy is actually slowing—but it is still a support to avoid recession. And then there is the new positive phenomenon of women working.
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