While the US economy started 2023 strong, a confluence of global and domestic factors is raising alarm bells for economists and investors across the board. Federal Reserve Bank of New York President John Williams emphasized the potential for a general weakening in US economic data as tariffs on Chinese goods take effect. Over the course of the year, the unemployment rate is expected to increase to a range of 4.5% – 5%. Meanwhile, the trade war with China is projected to send inflation up to 3.5% – 4%.
Trade tensions with China continue to be a major worry, affecting various aspects of the economy. With tariffs set to increase into 2019, their role in exacerbating inflationary pressures is troubling and likely to have longer-term impacts. Williams said that as the uncertainty around these tariffs continues to increase, resulting predictions of their total impact on the economy become more complicated.
The foreign exchange market has not been insulated from the effects of these economic conditions. The EUR/USD pair has pulled back from its recent multi-month high at 1.1473, hovering around the 1.1300 psychological line. The GBP/USD has seen quite the downward spiral as well. Today is giving back some of those previous advances, which had taken the pair to new highs above 1.3150.
In the wake of all of these challenges, Wall Street has defied gravity, eking out a new weekly close in the green. The increase comes as relations continue to sour between Washington and Beijing. Meanwhile, worries about an impending recession in the U.S., among other key economies, are mounting. The performance of the US dollar reflects this uncertainty, as it remains offered due to various economic indicators, including softer-than-expected Producer Price data.
We welcome the added flexibility afforded to the Federal Reserve by its current monetary policy and urge it to respond proactively to these developing economic conditions. Policymakers are now faced with a key question: whether the higher inflation rates will persist and spill into 2026. Williams claimed that attaining the Fed’s goals is integral to combating the dangers of stagflation.
Economic growth projections have begun to soften. Experts have since downgraded their expectations to less than 1% growth for this year. This is a sharp deceleration, leading many analysts to watch major economic indicators with bated breath in the next several months.
As 2023 continues, economic actors will have to find their way through an economic landscape marked by heightened uncertainty and volatility. Tariffs, inflation, and employment. These factors will determine the course of the US economy in 2023 and beyond.