17/08/2023 The picture for the world’s largest economy looks to be in full
bloom, with Fed interest rate rises yet to dim the prospects for the United States. Under
the veil of the land of the plenty – that is, a 2.4% GDP growth rate, much higher than the
1.8% predicted by economists – there still remain concerns as to where the economy stands.
From the beginning of the year until the halfway point of 30th June, the S&P
500 stock market was up 16%. It has marched onwards towards the all-time high even during
the quieter summer months. Markets have been climbing the wall of worry, gaining momentum
each time a risky situation has been resolved, whether it’s the bank panics of March 2023 or
the down-to-the-wire histrionics over the debt ceiling.
The debt ceiling deal is not just
a temporary allaying of a potential crisis – but a long-term improvement, especially in
light of the recent Fed rate hikes. Although some hardcore Republicans didn’t want a deal
under any circumstances, the Republican leadership came to argue for an increased debt
ceiling, but with spending cuts attached. The White House argued for an increased debt
ceiling without those spending cuts, instead with tax hikes on the wealthy. The resulting
compromise – the Fiscal Responsibility Act – provided a cap to the entire crisis. For the
markets, it delivered a breath of reassurance that borrowing would be under greater control
than before. Furthermore, the contagion surrounding the recent spate of bank failures has
also been curbed. What started as a direct consequence of the Fed hikes and the crypto
crisis became fears of a worldwide bank run on vulnerable institutions. Crypto-oriented
banks, affected both by the cryptocurrency crash and the Fed’s interest rate hikes, were
subject to an onslaught of withdrawals. Signature, Silicon Valley Bank, and First Republic
all victims of the contagion, with their own backgrounds and circumstances. Credit Suisse,
too, was hit. However, instead of the long-term economic crisis hitting even more financial
institutions, governments and central banks quickly stepped in to curb the damage. Though
the individual institutions involved, such as HSBC, UBS, or JPMorgan Chase, who helped
acquire the carcasses of those banks took a hit, the overall economy did not to the same
degree. In the US, when the Federal Deposit Insurance Corporation (FDIC) stepped in, the US
government established the Bank Term Funding Program (BTFP) to ensure deposits were honoured
– there was no more serious run on the bank, there was immediate action from central banks
to provide liquidity – the perception of a contagion was countered. The BTFP provided the
necessary short-term loans to provide that extra lifeline to banks. The domino effect
consequences of banks failing to meet depositors’ needs were avoided – and long-term bank
funding was in place. So, with regards to the spate of failures and vulnerabilities that
caused the most recent crisis scare, this has been nipped in the bud by the US government’s
swift response. Of course, the BTFP only kicked the can down the road rather than postponing
the day of reckoning forever. The loans only had a maturity date of one year, meaning that
if banks have failed to restructure their hedges and deleverage further, some issues could
yet return. But then the issue which kickstarted the problem in the first place has eased.
The Fed is no longer in swift and aggressive interest rate hiking mode. Part of the problem
for the banks at the beginning of this year was that they simply failed to spot the 180
degree turn from the “transitory” world to the reality of persistently sticky inflation.
Even in the summer of 2022, Silicon Valley Bank was taking off its hedges, assuming the Fed
would soon resume cutting interest rates. Powell and the FOMC were in no mood for that,
delivering more rate hikes rather than even thinking about thinking about cuts. Now,
however, there is hope: that inflation is falling and the Fed is starting to see the light.
The Fed’s preferred measure of inflation, the Personal Consumption Expenditure index (PCE)
fell to 4.1% in June, after six months sitting at 4.6% while headline CPI is below half of
the 8.3% reading from August a year ago. In response, the Fed’s aggressive rate hike
campaign will slow. Part of the reason for the softer landing in the US economy comes from
an increase in immigration, and in particular, of how actively those immigrants are joining
the labour force. The bonanza January payrolls number saw almost 1 million workers
added
to the labour
force, with the US Bureau of Labor Statistics
reporting
that “the
majority of the overall population level change is due to the increase in net international
migration”. This keeps a lid on inflationary pressures as the economy becomes more
productive. This not only signals good news for the economy but also for the US as a
destination for investors. It is still the most dynamic economy in the world, attracting
workers from every corner of the globe, and it still produces some of the most in-demand
products, whether that’s Disneyland, an iPhone, a Ford Mustang, or a Microsoft Surface
Laptop. Interest rates are now settling at a new, higher, plateau. The political noise is
largely confined to the headlines with little change expected in fiscal policy. The flexible
labour market and optimistic spirit of the American dream has ensured the US is better
disposed than most to adjust to the post-pandemic economy; one where we live and work a more
virtual life and supply chains are redrawn, favouring countries with secure access to
natural resources. The outlook is cautiously optimistic. 
Helen Thomas
CEO of BlondeMoney
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