Question

Prior to the pandemic, President Trump stated that our economy was doing well because the stock market hit an all-time high. Given our economy is based on capitalism, explain how he was correct and/or incorrect in his statements. Words count 1500

Answer 1

The Us economy in 2019 was doing extremely well as stock prices hit all time highs with highest price to earning ratios largely due to cut in personal income taxes and corporate taxes and lower interest rates by Federal reserve.

Spike in inflation last year was accustomed due to higher energy prices of crude oil and higher demand and spending which crossed inflation in CPi terms to 2.3percent.

The unemployment in 2019 has remained at 3.93 percent to 3.78 percent range and has decreased gradually due to higher capital expenditure by corporates after drastically cut downs of taxes which caused headroom inflation to spike and shoot.

As of 2019 end, the Fed funds rate remains at 1.7 percent and 10 year treasury yields at 1.8 percent and 30 year treasury yields at 2.07 percent. The chnages are exacerbated by anticipation of recession such that returns are higher in near term as risk is higher amd the economy looks to revive post 10 years which has caused yields to dip for 10 year and 30 years.

The yield curve has inverted which is strong indicator of recession as probability in near term as 5 year treasury yields are higher than 10 year and 30 years and hence long term view is stable but short term indicates slowdown.

Federal funds rate remains constant in anticipation of prevention of further inflation and st same time balancing counter effects of trade war so rise in funds rate can bring slowdown sooner however cut in rates can boost inflation levels and hence Fed maintain neutral stance.

Current primary concern of The US Fed is to monitor inflation as unemployment has been projected at 3.5 per cent however the negative implications of US china trade war and global uncertainty makes the Fed dovish but spiking inflation causes it to be hawkish amd thus is in tradeoff situation.

Conclusion :

The Fed must watch and react next month and look to keep interest rates constant and analyse aftermath as US china trade war has deescalated along with US Iraq war and sanctions on Iran and also must evaluate unemployment number before taking robust steps.

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