US Fed’s two percent inflation target make no sense today, says Mark Matthews

Jerome Powell, the man at the helm of the US Fed, has already managed to bring inflation down to 3 percent in June 2023, compared to 9.1 percent a year earlier. The price rise in the US has been consistently slower every month in the last year.

The world’s largest economy continues to add jobs outside the farms, although the pace of addition, in June 2023, was the slowest in over two and a half years. Signs are that the US economy is continuing to grow — at a slower pace — despite the ten rate hikes by the American central bank in 15 months.

Economic growth always comes with some amount of inflation. Trying to knock inflation down will also cause some collateral damage to the GDP.

The Fed’s balance sheet is still 80 percent larger than pre-pandemic levels, according to an analysis by Emkay Global. “Overall market conditions are not yet tight enough to engineer a recession,” said Madhavi Arora, the chief economist at the Mumbai-based broking firm. According to her, consumer spending has thus supported the US economy throughout the last year, albeit the excess savings are now almost exhausted.

Even after the Fed’s stubborn battle against price rises, The New York Fed’s latest survey of consumer expectations showed that Americans expected a 3.8 percent price rise over the next year. Meanwhile, home prices clocked their fifth straight monthly gain. There’s some anxiety around jobs but the wage growth is strong.

For the first time in 26 months, the latest US weekly wage growth was more than the inflation rate.

The officials at the American central bank are set to meet again on July 25, for a two-day review of the country’s monetary policy. The current odds suggest a 92.4 percent chance of another rate hike by Powell and the team. Telling the market that a slightly higher rate of inflation is acceptable, could inspire the market to rally further. S&P 500 is already near a 15-month high.