What We're Watching: US Fed's next move, China's stimulus, Chile's president needs a win
All eyes on Powell at Jackson Hole
Updated Aug. 26:Heard of Jackson Hole, Wyoming? That's where all the economic bigwigs from around the world are gathering for an annual three-day event focused on the state of the global economy. In a stark departure from his position throughout much of the pandemic that inflation would be “transitory,” US Federal Reserve Chair Jerome Powell said in a keynote address Friday that there would be “some pain” for households and businesses in the months ahead, noting that inflation continues to soar. Powell also said it’s likely that we’ll see a “softening of labor market conditions,” suggesting that record low unemployment – the current silver lining of the economy – could tick upwards. Indeed, the Fed chair sought to defend his track record to economists and central bankers, many of whom have been critical of him for waiting too long to raise interest rates. Many observers took Powell’s address as a sign that the Fed will continue to tighten monetary policy in the months ahead as inflation tops 8% over the previous year. What's more, some economists say the Fed could soon raise rates as high as 4% (its current target rate is 2.25-2.5%), sparking fears of a sharp recession. Still, inflation is mild in the US compared to parts of Europe, particularly the UK, where inflation is estimated to hit a whopping 18.6% early next year.
China grabbing at stimulus straws
China has announced an additional $44 billion worth of stimulus spending on infrastructure to breathe some life into its battered economy. Struggling businesses certainly need help: the real estate sector is drowning in debt, factories are shutting down due to a heat wave and an energy crunch, and rural banks are failing. But more importantly, zero-COVID is hurting both productivity and consumer confidence in a rebound anytime soon — and the government has no plans for relaxing the policy in the near term. It's an open secret that Xi Jinping knows annual GDP growth will fall far short of Beijing's 5.5% target for 2022. In fact, it'll probably end up at around 3% — a dismal performance for the world's second-largest economy. The timing could not be worse for Xi, who's getting ready to secure a norm-defying third term as secretary-general of the ruling Communist Party at the much-anticipated 20th Party Congress this fall. China's leaders are a bit distracted by Taiwan these days, but if they continue to drop the ball on the economy, the CCP’s marriage of convenience to the Chinese people since 1949 might be tested.