The Fed conundrum
Last week, US GDP fell at an annual rate of 1.4% which was worse than forecast. At the same time, the US just like the rest of the world is facing very high inflation and with no meaningful drop in sight, at least in the short term. As a result, the US Federal Reserve increased interest rates by 0.5% this week and signaled several more hikes to come this year. It also announced the start of quantitative tightening which will reduce the amount of liquidity within the economy. All these measures are good steps to help reduce inflation, however they will lead to a slowdown in the economy and risk a recession.
Federal Reserve Chair Powell is walking a tight rope and must try and engineer a soft landing of the economy amidst tightening economic conditions. While the Q1 GDP was disappointing, there are indications it was a one off and growth will return in Q2. The question is how much the Federal Reserve’s actions will impact the economy and if growth will halt to a grind. Economic indicators will be closely watched over the coming months for clues in which direction the economy is going.