The US Federal Reserve is experiencing a decrease in inflation, with rates dropping to 3% in June, the lowest since March 2021. The decrease in inflation is even lower than Japan’s historically low inflation rate of 3.3%. Despite the Fed raising interest rates by 500 basis points in the past 18 months, joblessness has remained steady, and the likelihood of a recession is decreasing. However, achieving a successful decrease in inflation without triggering a significant economic downturn is not guaranteed. Interest rates may still need to rise, and core inflation remains above the 2% target. Lowering demand to reduce price pressures could result in more job losses, presenting a trade-off between employment and price stability. It is also uncertain how quickly the Fed’s previous rate hikes have affected the real economy, and a significant portion of the rate rises has yet to be felt. The post-pandemic circumstances, such as changes in spending patterns and fiscal support, contribute to the anomalous combination of high rates, falling inflation, and limited unemployment. While there is optimism for a soft landing in the US and other economies, the uncertain climate presents frequent swings between soft and hard landing scenarios. Investors should be cautious in their expectations during this unusual interest rate cycle.
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