An improvement in the US markets… is it the beginning of the global economic recovery?


The improvement in the US markets and the positive sentiment among American consumers during the current summer season could be seen as a sign of potential economic recovery on a global scale.


Consumer confidence in the US has seen a significant boost, as inflation rates continue to slow down. The University of Michigan's consumer sentiment index rose by 11% in July compared to the previous month, reaching its highest level since October 2021. This is a notable improvement from June 2022, when consumer confidence hit an all-time low, and inflation soared to its highest level in four decades, reaching 9.1%.


Moreover, Americans' expectations for inflation rates in the coming year have moderated to 3.4%, which is much lower than the peak of 5.4% seen in April 2022. However, it still remains higher than the range observed in the previous two years during the COVID-19 pandemic, which ranged from 2.3% to 3%.


Federal Reserve's Stance on Inflation:

Federal Reserve Chairman Jerome Powell mentioned in a press conference after the Fed's decision to raise interest rates by half a percentage point that raising rates again remains an option if the economy improves and inflation slows down. He also pointed out that strong economic growth could lead to higher inflation over time, necessitating an appropriate monetary policy response.


However, it is still unclear whether the Federal Reserve will raise interest rates again in September or pause temporarily. This decision will largely depend on economic indicators in the coming weeks. The Fed requires sustained inflation decline to make a decision on raising interest rates again. Nonetheless, Powell consistently emphasizes that the labor market remains imbalanced.


Impact of Tight Labor Market on Inflation:

The tight labor market has been a factor contributing to inflation due to the impact of labor costs on consumer prices. A separate report from the US Bureau of Labor Statistics showed a decline in US wage gains in the second quarter, indicating some alleviation of inflationary pressures.


Overall, policymakers at the Federal Reserve welcome the slowdown in inflation. The Federal Reserve Bank of Chicago's policymaker, Austan Goolsbee, expressed his satisfaction with the recent slowdown in inflation, affirming that the Fed is on the right track to achieve its inflation target without pushing the US economy into a recession. Goolsbee also highlighted the unexpected progress in inflation deceleration within the services sector.


In conclusion, the recent data showing an improvement in consumer sentiment and a slowdown in inflation are positive signs for potential economic recovery. However, the Federal Reserve remains cautious in its approach to monetary policy, keeping an eye on economic indicators before making any further decisions on interest rates.

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