US economic growth quickens; Fed signals rate hike “soon”

US economic growth quickens; Fed signals rate hike “soon”
FILE PHOTO: A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, U.S., January 21, 2022. REUTERS/Brendan McDermid

The backstory:

  • When the pandemic hit nearly three years ago, economies around the world shut down while policymakers and governments came together to try to figure out what to do to keep things moving while millions were in lockdown.
  • In the United States, the answer was to pump US$6 trillion into the economy in COVID-19 relief. It contracted 3.4% in 2020, the biggest drop in the gross domestic product (GDP) in 74 years.
  • With this, though, the US quickly rebounded, with bored people on lockdown pouring money into buying physical goods, meme stocks and cryptocurrencies. Bitcoin hit record highs, and businesses, which weren’t ready for all this demand, struggled to fulfill orders.
  • With that struggle to meet orders and COVID-19 still disrupting a lot of things in other countries that supply components and goods to the US, inflation hit record highs at around 7% (the aim is around 2-3%).
  • This is while interest rates remain close to zero, and the US economy edges close to full employment.
  • This economic rebound and tightening monetary shift isn’t exclusive to the US. Canada has signaled a rate hike, and South Africa increased borrowing costs this week. Hungary, Chile and Singapore all have tightened policies. Australia is expected to lift rates as early as May.

The development:

  • We mentioned that businesses were struggling to meet the demand of us eager consumers, but now, they’re getting better, and with this improved ability to meet our demand, US economic growth beat forecasts and marked the strongest year since the 1980s.
  • On Thursday, the commerce department said that GDP increased at a 6.9% rate. With that, the economy grew 5.7% in 2021. This is the first time in 20 years that the US economy grew faster than China’s.
  • A lot of this growth started at the beginning of the fourth quarter when Americans, aware of the supply shortages, started their Christmas shopping earlier.
  • With this, Federal Chair Jerome Powell told reporters on Wednesday after a two-day policy meeting that “the economy no longer needs sustained high levels of monetary policy support," and that “it will soon be appropriate to raise" rates.

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