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Don’t Expect Slower Growth to Change the Fed’s Mind 

  • The rapid slowdown in the U.S. economy comes on the back of a scorching 6.9% of growth in the fourth quarter of 2021.
  • Because the U.S. Federal Reserve is more focused on inflation right now, there are growing concerns that higher commodity prices and borrowing costs will be the double-whammy that will possibly tip the economy into recession.
     

With the U.S. dealing with the fastest pace of price increases in over four decades, poorer-than-expected economic growth is unlikely to shake an increasingly hawkish U.S. Federal Reserve.

Driven largely by a reversal of the last quarter’s unexpected boom in inventory accumulation, the U.S. Department of Commerce is widely expected to report on Thursday that the U.S. economy grew at an annualized pace of just 1% in the first three months of 2022, according to a survey of economists by Reuters.

The rapid slowdown in the U.S. economy comes on the back of a scorching 6.9% of growth in the fourth quarter of 2021, when companies were looking to stock up on their inventories to cater to the expected post-pandemic surge in demand against the backdrop of fraying supply chains. 

Late last year, the flow of goods around the world eased and businesses found themselves producing far more than they sold in the fourth quarter of 2021, driving inventories higher and sending production lower in the first quarter of 2022.

While some analysts expect that personal consumption will rise to whittle down these inventories, that’s not a given because inflation is starting to have a drag on consumer sentiment and the economy is already showing signs of slowing down.

Because the U.S. Federal Reserve is more focused on inflation right now, there are growing concerns that higher commodity prices and borrowing costs will be the double-whammy that will possibly tip the economy into recession.

The Fed can only work with past data, and the effects in the first quarter of higher input and borrowing costs haven’t yet been fully felt because financial conditions still remained relatively loose and household finances remain strong, increasing the risks of policy missteps.

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