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Ian Explains: Is the US economy good or bad?
What’s going on with the US economy? On Ian Explains, Ian Bremmer breaks down the confusing state of America’s financial health.
Trying to make sense of economic indicators right now can be an exercise in illogic: unemployment is down, but inflation is still stubbornly sticky. Interest rates are higher than they’ve been in two decades, but stock indexes are closing at record highs. Adding to confusion, the upcoming US presidential election means that the economy is front and center, but Democrats and Republicans have a partisan interest in making things seem worse or better than they actually are. So what’s really going on?
When you look at the world’s post-Covid recovery, America is an outlier. US GDP grew faster than any other advanced economy last year. Wages are rising faster than they have in years, inflation, while sticky, is nowhere near its 2022 highs, and unemployment has been under 4% for the longest stretch since the 1960s. So why do only 28% of US voters have a positive view of the economy right now? Some economists are calling this moment “vibe-cession,” warning the negative “vibes” could have a major impact on the presidential election in November.
Catch GZERO World with Ian Bremmer every week at gzeromedia.com/gzeroworld or on US public television. Check local listings.
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The Federal Reserve building is pictured in Washington, U.S.
SVB collapse & interest rates: What’ll the Fed do?
US markets rebounded Tuesday, temporarily calming fears that the collapse of Silicon Valley Bank might trigger a domino effect that makes both investors and ordinary Americans lose confidence in the banking system. But the uncertainty ain’t over yet.
With the stakes so high, who you gonna call? No, not those guys. We mean the Federal Reserve.
Many of SVB's problems can be traced back to interest rates, which are the Fed’s thing. If you lean right, you probably think SVB’s financial ruin is the result of near-zero rates that made lending too cheap. But if you’re on the left of the political spectrum, you likely blame the bank's demise on the Fed reversing that policy and jacking up rates too much, too fast, which pushed up the cost of borrowing and ultimately killed SVB’s balance sheet.
That's all water under the bridge. What matters now is the Fed's next move.
The US central bank will decide on March 21-22 whether to hike rates further or leave them be. And the Fed is coming under growing pressure to do the latter to calm down jittery investors, Americans worried about the safety of their deposits, and uneasy foreign markets.
On the one hand, a fresh hike would make sense because inflation — the whole reason to increase rates in the first place — remains too high. Indeed, the US Consumer Price Index, which dropped Tuesday, showed that year-on-year inflation eased last month to 6%. Not bad, but still far from the Fed's 2% target.
Yet, holding off (for now) on rate hikes might signal that the Fed is bullish on US regional banks surviving the SVB fallout. Also, the job market is still tight, which reduces the odds of a US recession in 2023.
Don’t forget: A lot has happened in the financial world since SVB crumbled last Friday. And a lot more can still happen by the time the Fed has to make its call.U.S. President Joe Biden delivers remarks after the collapse of Silicon Valley Bank (SVB) and Signature Bank in Washington, D.C., March 13, 2023.
SVB collapse: Don’t say the B-word
US President Joe Biden on Monday addressed the nation to assure Americans that, whatever the fallout from the collapse of Silicon Valley Bank, their deposits and the entire banking industry are both "safe."
US markets responded with mixed signals to Biden's speech. On the one hand, stocks initially tumbled over fears that other regional banks might soon crumble too (banks in general took a hit because high-interest rates are really hurting their bottom line). On the other, non-bank stocks closed in the black due to growing chatter that next week the Fed might hold off on further rate hikes to give the financial sector some breathing room.
The situation remains fluid, and it's still too early to say whether the so-called "backstop" measures taken by US authorities will be enough to stop the risk of SVB's insolvency infecting other regional banks.
For more on how we got here, read our explainer Q&A with Eurasia Group’s Celeste Tambaro here.
Meanwhile, the more uncertainty, the louder the calls will get for Biden to do something more. Perhaps even (gasp!) the B-word: bailout. That would be very bad news for the president, who knows that bailouts are politically toxic. So toxic, in fact, that opposition to them brings together odd bedfellows like Sen. Bernie Sanders (I-VT) on the democratic-socialist left and Rep. Thomas Massie (R-KY) on the libertarian right.
For Sanders, SVB's collapse is a direct result of the Trump administration's 2018 push to deregulate smaller banks, as if we had learned nothing from 2008 — not to mention the savings and loan crisis of the 1990s. For Massie, the culprit is the Fed for keeping interest rates too low for too long, which spurred the rise of piggy banks for venture capitalists like SVB, and then for raising rates to tame inflation.
Sanders and Massie agree that bailouts create a moral hazard by encouraging banks to gamble with people's money. In this case, though, what US regulators have done is bend the rules for SVB depositors, including many tech companies.
Yet, what if the Biden administration needs to consider a bailout to prevent a financial meltdown? It's pretty clear how Sanders and Massie will vote, but other lawmakers might need to make a tough choice. And if both parties are too scared of their flanks, political paralysis is all but assured.
What do you think? Let us know here and we might include your response in an upcoming edition.