US GDP only reached 0.7% – A signal that the economy is slowing down and the difficult problem for the FED
The US economy has just sent a notable signal as Q4 GDP only reached 0.7%, much lower than the forecast of 1.4% and sharply down from 4.4% in the previous quarter.
This figure shows that the growth momentum of the world's largest economy is clearly slowing down, while putting the US Federal Reserve (FED) in an extremely difficult position in conducting monetary policy.
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The US economy is sharply slowing down
The drop from 4.4% to only 0.7% in just one quarter indicates that the growth momentum of the US economy is significantly weakening.
Some main reasons cited include:
- Consumer spending slows down
- Business investment weakens
- Exports decrease
- Government spending slows down
- The impact of prolonged high-interest rates
These factors indicate that the monetary tightening policies in the past have begun to have a clear impact on the real economy.
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The FED is at a 'policy crossroads'
In the current context, the FED faces a very difficult choice.
If it continues to maintain high interest rates:
- Inflation may be better controlled
- But the economy is at risk of weakening sharply or falling into recession
If it starts to lower interest rates:
- Could stimulate economic growth
- But the risk of inflation returning is entirely possible
This is precisely the situation that economists refer to as a 'policy dilemma' – the quandary in conducting monetary policy.
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Another major pressure: Huge debt interest payments
Alongside the slowing growth, the United States also faces a tremendously large issue: the cost of interest payments on public debt.
Currently:
- US public debt has exceeded 38 trillion USD
- Annual interest expense is approximately 1 trillion USD
Notably, this interest payment has exceeded even the US defense budget.
When interest rates remain high, the US government has to spend increasingly large amounts of money to pay interest on bonds. This creates a dangerous spiral:
High interest rates → Increased interest payments → Rising budget deficits → Need to issue more debt → Public debt continues to swell.
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The risk of Stagflation is beginning to be mentioned
Some economists have begun to warn about the possibility of Stagflation – a situation where the economy experiences weak growth along with high inflation.
If this scenario occurs, the FED will find itself in an extremely difficult situation because:
- Lowering interest rates could lead to rising inflation
- Keeping interest rates high could lead to an economic recession
This is one of the most difficult scenarios to manage in macroeconomics.
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Impact on financial markets
Weak GDP data often creates significant impacts on asset markets.
For crypto and stocks
As the economy slows down, the market begins to expect the FED to cut interest rates sooner. This means that liquidity may return, a factor that often drives risky assets like crypto to grow.
For gold
In an environment of weak growth and high public debt, gold is often viewed as a safe-haven asset, so the upward trend of gold may also be supported.
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Conclusion
The fact that US GDP only reached 0.7% in Q4 is a signal that the economy is beginning to show a significant slowdown after a previous period of strong growth.
This puts the FED in a difficult situation:
having to control inflation while avoiding excessive weakening of the economy.
In this context, the global financial market – especially crypto – is closely monitoring the FED's next moves, as any signs of monetary easing could act as a catalyst for a new growth cycle of risky assets.
