• Key policy rate: 4.5-4.75% (November 2024)
• GDP growth rate: 2.8% (Q3 2024) 
• Manufacturing Purchasing Managers’ Index reading: 48.5 (October 2024) 
• Inflation rate: 2.6% (October 2024) 

The US is the world’s biggest economy, accounting for one-fourth of global economic activity. The Federal Reserve, its central bank, is arguably the most influential monetary authority in the world as its interest rate decisions affect yields on global assets, including foreign currencies. 

In September 2024, the Fed began loosening high interest rates in place since 2022 starting with a 50-basis-point (bp) reduction followed by a 25 bp cut in November, thereby exerting ripple effects on the global financial markets. The Fed’s rate cuts, likely to be followed by additional reductions, will trigger capital rebalancing worldwide as the competitiveness of US financial assets wane given lower yields. 

On bonds, the US yield curve (or the difference in interest rates between 10-year and 2-year Treasury notes) was inverted since July 2022, indicating that global investors are approaching the economy with heightened caution as appetite is stronger for debt with shorter maturities. This 13-month inversion is already the longest in US history, and many took this as a warning sign for a recession – a fear that has not materialized. 

Household consumption is the main driver of US economic output, accounting for two-thirds of GDP. Growth is largely driven by purchases of durable goods and spending on services. 

Former President Donald Trump is set to return to the White House following his victory against Vice President Kamala Harris in the 5 November election that also saw Republicans dominate the House and Senate. Trump’s promised personal and corporate income tax cuts will ultimately translate to a wider budget deficit, while the adoption of increasingly protectionist trade policies through a 60 per cent tariff on Chinese imports and a 10-20 per cent duty on all other imported goods would further raise the cost of consumer goods. A Republican Congress gives Trump free rein in terms of issuing more debt, adding to fiscal pressures.  

House view: Fears of a US recession in recent months have been overblown and developments in the jobs sector and the inflation rate have been encouraging. Lundgreen’s believes that the US’ economic managers have since adjusted to elevated, albeit still within, target inflation which gives the Fed elbow room to gradually reduce the federal funds rate to stimulate greater economic activity amid a global slowdown. However, faster inflation plus a widening fiscal gap would require the Fed to go slower in cutting interest rates and would exert pressure on long-term bond prices.

Updated as of 21 November 2024