How is a Slowdown in US Economy a Good Thing? 

How is a Slowdown in US Economy a Good Thing? 

2022-08-01 • Updated

The bad news is that the US economy slowed for the second consecutive quarter in 2022, entering a technical recession. That's two consecutive quarters of gross domestic product (GDP) contraction. However, the good news is a slowing economy may be what the US needs to win its fight against inflation.

As the US economy reopens to recovery from the pandemic, economic growth rebounded fiercely, supported by consumers spending their savings and the stimulus that was pumped into the markets. But this insane support has driven prices so strongly that inflation got out of control (9.1%, the highest in 40 years), with strong demand and modest supply.

USeconomy.png

Were the Fed's rate hikes helpful in dampening demand? 

The Fed's intervention to bring inflation back to its 2% target, after raising interest rates four times since March 2022, two of them in a row by 75 basis points, is reflected now in the economy. While the US central bank relies on its favorite tool - the interest rate - to cool demand and inflation by making borrowing more expensive, it risks plunging the economy into a recession.

It seems that the sharp rate hikes are starting to show their results. The US economy contracted by 0.9% in the second consecutive quarter, reflecting the economy's weakness with slowing consumer spending amid rising prices, declining investment and economic activity, and a damp housing market. The Fed wants to see demand fall for "a sustained period" to give inflation a chance to come down without entering a deep recession, Fed Chair Jerome Powell said.

While Powell thinks the US economy isn't in a recession right now, he admitted that the economy is slowing and will likely need to slow more to bring inflation back to earth. The Federal Reserve said it wouldn't be easy in its fight against the highest inflation in 40 years, even if it means a shrinking economy and a slowing job market.

How is a slowdown in the US economy good? 

The more the economy slows down, the inflationary pressures will fall, and prices will calm down. Subsequently, this may prompt the Fed to ease the aggressive rate hikes and will head for smaller increases in the upcoming meetings. The danger is that with a shrinking economy, demand could fall so dramatically that the economy would be pushed into recession.

Will the contraction of the US economy affect the Fed's rate hikes? 

We don't think the GDP decline should affect the Fed's rate hike cycle. The reason is that evidence of a slowdown has yet to appear in US employment data or a rise in layoffs, which economists also use to gauge whether a country is in a recession. The unemployment rate stabilized at 3.6%, the lowest from pre-pandemic levels. 

The upcoming labor market data will be the best ground for whether we're heading into a recession or not. Jerome Powell dismissed questions about whether the US economy is in or on the cusp of a recession, arguing for the labor market's strength because US companies continue to add more than 350,000 jobs each month.

LOG IN

Similar

TRADE IDEA: What's Next for Yen Crosses?
TRADE IDEA: What's Next for Yen Crosses?

The views here are solely based on Technical Analysis techniques using my personal Smart Money approach. Hence, it is important to understand that the trading of CFDs comes at a risk; if not properly managed, you may lose all of your trading capital. To avoid costly mistakes while you look to trade these opportunities, be sure to do your own due diligence and manage your risk appropriately.

TRADE IDEA: BREAKDOWN OF MAJOR PAIRS
TRADE IDEA: BREAKDOWN OF MAJOR PAIRS

Even though we've only witnessed sluggish movements from the Dollar over the past few weeks, the general idea and bias still seem intact and untampered. The bullish impulse however can be seen as "searching for support".

TRADE IDEA: EURUSD, AUDUSD, and GBPUSD
TRADE IDEA: EURUSD, AUDUSD, and GBPUSD

As I earlier indicated in my article this week, I am expecting an upward push from the Dollar as a reaction from the Demand zone I have marked out. The PPI release earlier moved prices a bit but lacked sufficient momentum to cause a significant break of structure - and thus, no change of trend.

Latest news

TRADE IDEA: IS THE FUTURE OF GOLD CLEAR YET?
TRADE IDEA: IS THE FUTURE OF GOLD CLEAR YET?

For those who may be unfamiliar with Price Action trading, the horizontal arrows represent areas where the market structure was broken. As you can see in the scenario above, price broke below the previous low at the two marked instances

TRADE IDEA: Technical Breakdown of Top Cryptos
TRADE IDEA: Technical Breakdown of Top Cryptos

Let's start off with a look at the Daily timeframe on Bitcoin. We currently see price reacting to the rally-base-rally demand zone between the 15,600 - 14,300 price area. Price also seems to have found support off the trendline support as marked in the image above. Interestingly, this means the overall bias on BTCUSD is Bullish.

CBDC: Technology of the Future or Dystopia?
CBDC: Technology of the Future or Dystopia?

Central Bank Digital Currencies (CBDCs) are virtual national money. The idea of ​​creating such currencies came to the authorities after the success of cryptocurrencies, which also exist only in digital form.

Deposit with your local payment systems

Feel the Team Spirit

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

Beginner Forex book

Beginner Forex book will guide you through the world of trading.

Beginner Forex book

The most important things to start trading
Enter your e-mail, and we will send you a free Beginner Forex book

Thank you!

We've emailed a special link to your e-mail.
Click the link to confirm your address and get Beginner Forex book for free.

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera