High inflation and tight monetary policy in the world's largest economy could threaten a worldwide "soft landing" as U.S. economic growth continues to outpace its potential.
As global financial leaders gather in Washington this week for the IMF and World Bank's spring meetings, the world's short-term economic prospects may depend on whether the surprising U.S. success is driven by positive forces like increased labor supply and productivity or by outsized fiscal deficits that keep demand and inflation high.
One solution supports what Chicago Federal Reserve President Austan Goolsbee calls a "golden path" of robust growth and declining inflation in the U.S. and other nations tethered to it via exchange rates and trade channels that have kept imports near record highs.
The other might indicate a difficult road if the Fed determines U.S. demand is too strong for inflation to fall and postpones interest rate decreases or even raises rates, which were almost off the table.
Recent data have been unhelpful, with inflation stalled well above the U.S. central bank's 2% target for the first quarter, GDP still growing above potential at 2.4% for the January-March period, according to an Atlanta Fed tracker, and Fed officials hedging their words about rate cuts.
"We're not yet where we want to be on inflation," Richmond Fed President Thomas Barkin said last week, capping a seven-day run in which U.S. jobs data showed firms hired 303,000 more workers in March, two to three times the estimated non-inflationary pace, and new inflation data reversed the trends Fed policymakers used last year to pivot toward rate cuts in 2024.
Fed-monitored inflation expectations also indicate stalling. Wall Street's main indexes fell on Friday, following a week of higher-than-expected inflation and jobs data that shifted investors' interest rate decrease expectations.
Global officials will likely have noticed the data's rapid market reaction that lowered the outlook for Fed monetary easing ahead of this week's discussions on whether the world's post-pandemic inflation and tight monetary policy is ending or on hold until the U.S.
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