In recent months, the Federal Reserve's interest rate cuts have been one of the hot topics in global financial circles. However, data released earlier significantly lowered public expectations for rate cuts. Stubborn inflation has not been alleviated, and the latest report from the U.S. Department of Commerce last Thursday revealed a startling news: the growth rate of the U.S. GDP slowed significantly in the first quarter, yet inflation continued to rise.
This situation is very close to stagflation. In the latest report from UBS, they mentioned this concept, believing that the United States is currently facing the risk of stagflation. Investors, institutions, and high-ranking government officials have not noticed this crisis, treating these issues as isolated crises.
The so-called "stagflation" refers to a state of economic stagnation combined with high inflation and high unemployment rates. It is only called stagflation when these three conditions coexist.
Stagflation is a disaster for every party involved. For government departments, the biggest problem with stagflation is that it is difficult to resolve in the short term. It is challenging to simultaneously solve the issues of high unemployment, slow economic growth, and high inflation. Focusing on resolving one problem may likely exacerbate the other two.
For investors and investment institutions, stagflation is also an exceptionally terrifying scenario because it means that reliable investment options will become increasingly scarce. The stock market, bonds, and real businesses will all face difficulties. Enterprises struggle to develop with high unemployment and a lack of investment, further leading to economic growth and inflation issues.
Initially, the Federal Reserve hoped to reduce inflation to below 2% while maintaining economic growth. However, according to public data from the U.S. Department of Commerce, the GDP growth rate in the first quarter was far below the expected 2.5%, only at 1.6%, and the inflation data were not controlled.
Currently, high inflation rates and a slowdown in economic growth are evident, and we are only a step away from stagflation - the "high unemployment rate". However, the current unemployment rate in the United States is still manageable. According to the latest non-farm data, the U.S. unemployment rate remains below 4% at a healthy level, so it has not yet reached stagflation.
Mark Haefele, UBS Global Wealth Management's Chief Investment Officer, shared his views on the situation, believing that the current situation is not very severe. The biggest problem now is the lack of vigilance in the market and government departments, leaving them unprepared for a potential crisis.
