Looking back | Towards a soft landing in the United States

Chronicle writing is an art that is often practiced in the heat of the moment. The end of the year is a good opportunity for our columnists to see what they could have done differently, in hindsight.




Just a year ago, very few experts predicted that the American economy would be able to get through the strongest interest rate hike ever orchestrated in 40 years without suffering significant damage. Although still possible, the scenario of an inevitable recession for the beginning of 2024 seems more and more improbable as the American economy aligns itself resolutely towards a soft landing.

Throughout the past year, the American economy and the American stock markets have progressed against the backdrop of the constant threat of a recession occurring in 2024 due to the 11 interest rate increases successively decreed by the Federal Reserve. (Fed) from March 2022.

The consensus at this time last year was that the shock treatment prescribed by the American monetary authorities to stem the rise in inflation would lead the economy into recession and the dream of a soft landing desired by the Fed was in doubt. made a lure that she waved to calm the spirits.

And yet, this is the path in which the American economy increasingly seems to be heading while the apocalypse scenarios that some feared due to too abrupt and too rapid increases in interest rates are not yet taking shape. in reality.

It is quite the opposite that we have observed until now. The US economy continued to grow by a solid and surprising 5.2% at an annualized rate in the third quarter as consumer spending remained strong and the employment situation remained extremely favorable. throughout the year.

While rising interest rates slowed new housing construction activity in the United States in 2023, they did not have the insidious effect that mortgage renewals may have had on economic activity in Canada.

Unlike the situation that prevails here, mortgage loan holders in the United States do not have to renew the terms of their mortgage every three or five years, the borrowing conditions remain the same over the duration of the term. maturity of the loan. American homeowners have not had to endure sudden increases in monthly repayments.

The American stock markets were not left out as the various indices recorded several successive record closing levels during the month of December alone. The Dow Jones rose by more than 10% in 2023, the S&P 500 by 20% and the NASDAQ by 40%.

Despite this solid economic performance, the inflation rate still fell in the space of one year from 9.1% to 3.1% in the United States, a rate even higher than the 2% target desired by the Fed, but still very comfortable compared to last year’s worrying peak.

No apocalypse in sight

The situation has improved to the point that the Federal Reserve has even regained the necessary latitude to announce that it could begin to reduce its key rate during next spring, citing three possible cuts that could bring the key rate back American at almost 4.5%.

Jimmy Jean, chief economist and strategist at Desjardins Group, believes that the American Federal Reserve has succeeded so far in its challenge of bringing inflation back to acceptable levels without sacrificing the economy.

A soft landing is on the way, although some slowdown is expected.

“Unlike Canada, Quebec or Europe, the United States is doing better. They took advantage of excess consumer savings which supported economic activity, they had a nice increase in their active population and they made very significant productivity gains in the third quarter, this helps to reduce inflation. , the Desjardins economist explained to me.

Historically, we know that when credit conditions are tightened too markedly to slow down economic activity and reduce inflation – as we have just done in Canada and the United States – there is a strong risks causing a recession and a decline in the markets.

This is what we have observed almost systematically over the different economic cycles and very markedly at the beginning of the 1980s when interest rates crossed the 20% mark in order to stem the galloping inflation generated by the second oil shock of 1979.

In short, the examples of deterioration of economic conditions linked to the rise in interest rates are much more numerous than the cases of soft landing like the one that the Federal Reserve wanted to see happen, but the latter exist and we seem to be on the way to experience one in 2024.

Happy New Year to you, dear readers.


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