United States: the task is not finished

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The United States has achieved something that a year ago seemed impossible: significantly reduce inflation (it was above 9% in the summer of 2022, now it is at 3.5%) without increases in the unemployment rate. , which currently stands at 3.8%. Although the disinflationary process has progressed noticeably, the task is not finished. Inflation is still above the 2% target. Furthermore, after falling consistently, in the last three months it has been stagnant at the same level. Furthermore, despite the most pronounced cycle of monetary tension in the last 40 years, the United States economy shows no signs of weakness. A year ago, the debate focused on whether there would be a soft landing or if the plane would crash (that is, if there would be a recession), today the discussion is whether there will be one or if, on the contrary, it will not occur and the economy will continue to fly high. The most recent estimates based on high frequency indicators suggest that in the first quarter economic growth was high, around 3% at an annualized rate. The stagnation of the disinflationary process, together with the strength of the economy, has radically changed the market expectation about what the Federal Reserve (Fed) will do with interest rates. Before this stagnation, at the end of 2023, the markets thought that the Fed would make six cuts of 25 basis points each; Now only two are anticipated, and there are even analysts who believe that the next movement may be an increase. This has led to falls in the stock markets, a general appreciation of the dollar, and increases in long-term interest rates. It seems that the most possible scenario is that US inflation will continue to fall, although this will occur in a non-linear manner. and gradual. But it is most likely that it will continue to decline because, to a large extent, inflation remains above the target for one component: imputed housing rents (the amount with which families believe they would rent their own home) are very high. However, when analyzing the behavior of rents, which have decreased very noticeably, it is expected that imputed rents will decrease in the coming months. This will allow the Fed to start a cycle of reductions in the third quarter, which will boost to the stock markets, and would decrease the probability of observing a recession, although eventually monetary restriction will reduce the pace of growth: we may see a soft landing. However, there is a risk scenario: that the conflict in the Middle East expands, which would increase oil prices and inflation. A promising scenario, but with high uncertainty. Carlos Serrano, from BBVA Research. Follow all the Economy and Business information on Facebook and xor in our weekly newsletter

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