The US Economy Faces Contradictions among its Economic Mandates

Harvest Global Markets :

Given the financial uncertainty and strong labor market, the Federal Reserve (Fed) is adamant about bringing inflation to its target rate of 2% to ensure price stability and sustainable economic growth in the long run as per their macro-economic mandates. The Fed intends to lower the labor demand and economic growth by increasing its interest rate to combat the four-decade high inflation faced by the US economy. It can be ready to accept below-the-trend growth in the short run, rather than letting inflation take ground in the economy.

The unemployment rate has been observed at record lows, indicating a strong labor market which results in higher wages being offered to employees to fill the job vacancies. The central bank officials are certain that a slowing labor market will result in reduced wage growth, which has been accelerating at its fastest rate in decades and is currently fueling inflation. This is being rationalized by the Fed as an essential economic rebalancing. It has conceded that it might take time and increase unemployment in order to reduce inflation.

Aligned with this outlook, is the latest release of the Job Openings and Labor Turnover Survey by the US Bureau of Statistics which indicates a decline in the labor market, as job openings fell to 10.1 million in August, a 1.1 million decline from July with aggressive interest rate hikes. The Fed will commend such a decline, as it believes that the current rate of pay growth, which is roughly 6.5 percent per year according to some estimates, is unsustainable and a major contributor to inflation.

The increased borrowing costs for individuals and businesses might expect to slowdown the economic growth amid the soaring inflation. Contrary to this economic mandate is the raising concern of a recession a waiting the world’s largest economy.

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