The 360-degree view of the world economy this week can be summed up as cautiously optimistic. Or maybe optimistically cautious. Either way, the emphasis is on caution. While the International Monetary Fund forecast a milquetoast 3.2% global economic expansion with a continued decline in inflation, low productivity and international trade tensions loom over the landscape. It also doesn’t help that the past week has provided a jarring lesson in how world economies are inextricably linked with geopolitics. With escalation tied to the war in Gaza pushing the Middle East closer to conflagration, central bankers are girding for potential oil shocks that could reignite consumer-price growth. And the US Federal Reserve this week indicated it will wait longer to cut interest rates, with American inflation reluctant to fall back to its 2% target, in large part due to commodity and rent prices. Some Fed observers are now even floating the possibility that the central bank, which long ago paused its rate-hiking campaign, might resume with a fresh bump aimed at reducing demand across a robust US economy.
But this further delay of rate cuts doesn’t occur in a vacuum. In another example of that interlocked global economy we spoke of, fallout from this cautious approach is spreading around the world, sending the dollar surging and forcing other currencies lower. In turn, post-pandemic economic recoveries from Latin America to Asia are being kneecapped. As Marcus Ashworth writes in Bloomberg Opinion, “the strength of the US currency risks fracturing global trade.” But there’s another, curious theory about this entire dynamic that’s getting attention of late. While much of the progress in lowering US inflation has come from the supply side of the economy—untangling supply chains and immigrants filling vacant jobs—monetary policy mainly works through the demand side. And consumers are still emptying their wallets despite higher costs. So on Wall Street, where two years of recession predictions tied to high interest rates failed to materialize, some are now entertaining a fringe economic theory: The US economy is booming because of higher rates rather than despite them.