In my personal understanding, the rise of the dollar indeed brings a decrease in risk appetite, but the current economic data from the United States is quite good. The expectations for GDP growth and the unemployment rate remaining at a low level both indicate a positive economic outlook. Therefore, for the Federal Reserve:
The path for inflation to return to 2% is for inflation to continue to decline, while wages continue to rise, and the stock market continues to rise. Everyone is buying tech stocks for hedging, and purchasing power remains high.
The increase in purchasing power fuels the difficulty of inflation decreasing. If inflation does not decrease, high interest rates must be maintained, and under high interest rates, some companies will face difficulties in financing. After all, not all companies in the U.S. are tech stocks. For example, my reference in the U.S. stock market, $NKE (Nike), has only managed to rebound a bit thanks to the pause in interest rate hikes and expectations of rate cuts, but now it is not far from the lowest point of this cycle.
So currently, we are in a period of economic and inflation competition. If the economy is good and everyone is making money, it will be very difficult for inflation to return to 2%, and the Federal Reserve will not easily cut interest rates. Meanwhile, low-income individuals will start to struggle, and non-tech companies will begin to suffer, leading to a wave of bankruptcies, rising unemployment, and the economy falling into a dilemma, with income decreasing and inflation dropping, prompting the Federal Reserve to start cutting interest rates.
The general trajectory is like this. To put it simply, the better the economy, the harder it is for inflation to decrease, and the slower the steps to cut interest rates will be, increasing the probability of black swan events and economic recession.
So is there a chance that the economy can rise while inflation decreases, allowing the Federal Reserve to continue cutting interest rates in a favorable economic situation? The answer is yes, but achieving this goal will be extremely, extremely difficult.
It has happened in history, but it is very challenging. I checked, and it has only occurred four times, namely:
- Post-World War II economic recovery (1946-1950s)
- Early 1970s "stagflation"
- Early 1980s "Reagan economic recovery"
- Recovery period after the COVID-19 pandemic (2021-2022)
High inflation does not necessarily hinder economic growth, but prolonged high inflation can weaken economic competitiveness.
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