Stronger GDP adds wrinkle to Fed rate increases
The economic situation in the United States took an interesting turn on Wednesday as third-quarter GDP rebounded more strongly than initially forecast, which will keep pressure on the Federal Reserve to continue its interest rate increases in a battle with inflation, although perhaps at a less robust pace.
“We will stay the course until the job is done,” Fed Chair Jerome Powell said on Wednesday in a speech to the Brookings Institution in Washington. He noted that even though some data suggest inflation slowing next year, “we have a long way to go in restoring price stability”.
“Despite the tighter policy and slower growth over the past year, we have not seen clear progress on slowing inflation,” Powell said.
“It makes sense to moderate the pace of our rate increases as we approach the level of restraint that will be sufficient to bring inflation down. The time for moderating the pace of rate increases may come as soon as the December meeting.”
The country’s GDP increased at a 2.9 percent annualized rate, the US Commerce Department said on Wednesday in its second estimate of third-quarter GDP, up from the 2.6
percent pace reported last month. The economy had contracted at a 0.6 percent rate in the second quarter.
Sharpest rise in 40 years
Raymond Hill, a senior finance lecturer at Emory University’s Goizueta Business School, told China Daily that together with numbers from the labor market, “it shows that we were not in a recession in Q3 and that the economy has been healthy from a growth and jobs perspective (if not from an inflation perspective)”.
The Fed’s response to the sharpest rise in US inflation in 40 years has been a similarly abrupt increase in interest rates. With half a percentagepoint increase expected at its Dec 13-14 meeting, the central bank will have lifted its overnight policy rate from near zero as of March to the 4.25-4.50 percent range, the swiftest change in rates since then-Fed chair Paul Volcker battled an even worse rise in prices in the early 1980s.
“My guess is that the GDP growth numbers tilt the field somewhat in favor of another 75 basis point (interest rate) rise, but in any event, the Fed funds rate will continue to go up,” Hill said. “In any event, the Fed is still playing catchup after severely missing inflation forecasts earlier in the year, and the situation they are trying to deal with is very muddled.”
Stocks rallied on Powell’s comments. The S&P 500 finished up 3.1 percent on Wednesday, while the Dow Jones Industrial Average rose 737 points, or 2.2 percent. The Nasdaq Composite moved 4.4 percent higher. The Dow is now back in a bull market, which is when an index moves 20 percent above a recent low.
“Today’s speech gives more hope for the possibility of that elusive soft landing,” Hank Smith, head of investment strategy at Haverford Trust, told The Wall Street Journal. “From the market’s perspective, there’s the chance of a soft landing as opposed to a hard landing that’s a traditional recession.”
On the economic front, payroll services firm ADP reported that US private payrolls rose by 127,000 in November. Economists polled by The Wall Street Journal had forecast a gain of 190,000 private sector jobs.