The U.S. economy has experienced an unprecedented crisis under the impact of the new crown epidemic. In response to the crisis, the Federal Reserve and the Treasury Department have adopted a series of stimulus measures, including interest rate cuts, quantitative easing, fiscal deficits, etc. These measures have alleviated the economic downturn to a certain extent and boosted market confidence, but they have also brought about a rise in inflation.
In December last year, Fed Chairman Jerome Powell and Treasury Secretary Janet Yellen both announced that the U.S. economy had achieved a "soft landing", that is, the economy had resumed growth under the premise of controlling inflation. They also said that the Fed will begin a cycle of interest rate cuts to further stimulate the economy before inflation reaches its 2% target. This news made both the US ** and the bond market cheer, believing that the US economy has come out of the predicament and ushered in a new prosperity.
However, this optimism was soon shattered. In January of this year, the U.S. Bureau of Labor released inflation data for December, and the results were shocking. The U.S. CPI significantly exceeded expectations both year-on-year and month-on-month, reaching its highest level in nearly three months. Among them, in addition to volatile factors such as energy and food, other core CPI and super core CPI also show a comprehensive trend.
This means that inflation in the United States is not temporary, short-term, and controllable, as Powell and Yellen said, but persistent, long-term, and difficult to contain. This inflation even happened before the Fed and the Treasury really implemented their plans to cut interest rates and release water. If they do follow the original roadmap and start cutting interest rates and increasing monetary rates sharply in March this year, then inflation in the United States could spiral out of control, triggering an even greater economic catastrophe.
This presents the Fed and the Treasury with a dilemma. On the one hand, if they insist on maintaining a policy of high interest rates in order to curb the contagion of inflation, then they must abandon their goal of stimulating the economy, admit that the previous soft landing narrative was wrong, and face the disappointment and distrust of the market. On the other hand, if they continue to implement their plans to cut interest rates and release water in the face of inflationary pressures, then they must risk runaway inflation and admit that the previous soft landing narrative was false, facing the collapse and chaos of the economy.
This choice is very difficult for any rational economic decision-maker. However, for the political leaders of the United States, the choice is even more complicated. Because this is the first year for the United States, Biden and his Democrats are facing strong challenges from the Republican Party and Trump. In this case, Biden and his team need to use US economic data to prove their ability to govern and increase their campaign chips. Cutting interest rates and releasing water is undoubtedly the most direct and effective way to improve economic performance and bring more jobs, income and welfare to people.
That's why Biden and his henchmen Powell and Yellen both began to build momentum for interest rate cuts and water release before the first year, trying to make the U.S. economy soft land and put gold on themselves. Their plan is to start throwing coins in March this year, just in time for the Democratic primary, so that Biden can gain more support both inside and outside the party, and lay the foundation for re-election.
However, now the unexpected** inflation data has put their plans in a difficult position. If they don't cut rates, then they will lose the opportunity to stimulate the economy, put Biden at a disadvantage in the election, and maybe even be defeated by Trump who shouts "Make America Great Again." If they cut interest rates, then they will exacerbate the worsening of inflation, turn a soft landing for the US economy into a hard landing, and may even be nailed to the pillar of shame in history.
This is a question that has no right answer, and one that does not end well. The U.S. economy has fallen into an inextricable predicament, and U.S. politics has fallen into an insoluble dilemma. All of this stems from the fact that the United States has overrelied on monetary and fiscal stimulus in response to the crisis of the new crown epidemic, while ignoring structural reforms and adjustments. This is a heavy price and a painful lesson.