Despite rising inflation, the Fed may cut rates, exacerbating debt spiral and leading to stagflation.

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As the US sails through the murky waters of economic uncertainty, recent indicators paint a troubling picture. The first quarter of 2024 saw GDP growth fall short of expectations, raising concerns about the nation’s economic trajectory. But it’s not just sluggish growth that’s causing ripples; inflation has been steadily climbing for the past four months, defying predictions and accelerating at an alarming rate.

The question on everyone’s mind: Will the Federal Reserve be forced to hike interest rates to tame the inflation beast? The data suggests a troubling scenario. Bonds, traditionally seen as a safe haven during economic turbulence, have shattered a 40-year uptrend. This breakdown, coupled with the potential for Fed rate cuts, creates a volatile landscape where predicting market movements feels akin to navigating a stormy sea.

Yet, amidst the chaos, there are glimmers of hope. Technical analysis hints at a possible bounce in the near future, offering a lifeline to investors navigating choppy waters. However, beneath the surface, there lurks a more ominous reality.

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The combination of sky-high levels of debt and rampant inflation paints a grim picture for the decade ahead. It’s a debt spiral in disguise, with stagflation looming as the inevitable consequence of fiscal recklessness. Despite the Fed’s mandate to control inflation, the looming specter of a debt spiral may force their hand, leading to rate cuts regardless of where inflation stands.

In this economic saga, the stakes are high, and the path forward is fraught with uncertainty. Will the Fed steer the ship to calmer waters, or are we doomed to navigate the stormy seas of stagflation? Only time will tell.

Sources:

https://www.bea.gov/news/2024/gross-domestic-product-first-quarter-2024-advance-estimate

https://www.ey.com/en_us/insights/strategy/macroeconomics/us-gdp-q1-2024-first-estimate

https://www.usinflationcalculator.com/inflation/current-inflation-rates/

https://www.bls.gov/cpi/

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