Weekly Economic Trends and Indicators
The Headline:
On July 26, the Federal Open Market Committee (policy making arm of the Federal Reserve) raised the target range for the federal funds rate by 25 basis points. The target range now stands at 5.25%-5.5%. This is the highest the fed funds rate has been since 2001. The next day, the Bureau of Economic Analysis reported that 2nd quarter real gross domestic product (GDP) rose at an annual rate of 2.4%. This is up from a 2.0% increase in real GDP in the first quarter.
The Details:
The interest rate increase was widely anticipated after the pause in rate hikes in June. In the days following the June meeting, most analysts expected two more rate increases out of the four remaining meetings in 2023. As we have noted over the last few weeks, the economy remains strong. Furthermore, inflation, while still elevated, is returning to normal levels.
There is much to like in the details behind this quarter’s GDP figures. Looking at the components of GDP, we see a balanced picture of growth with consumption, investment and government all contributing positively to the 2.4% growth rate. Net exports were essentially flat for the quarter. Inventories also saw little change.
Perhaps even better news in the report was the decline in core PCE inflation which came in at 3.8% for the 2nd quarter, down from 4.9% in the first quarter and the lowest increase since the first quarter of 2021.
The Context:
We are once again left with two important questions after this news. First, will the Fed continue to raise interest rates, and second, have the probabilities of a recession materially changed? In the news conference after the Fed’s announcement, Chair Jerome Powell made it clear that the course of future interest rate increases is not set in stone. Throughout this series of rate hikes, Powell has reiterated that the committee is looking at all incoming data. It does, however, appear that we have moved into a distinctly different phase in the tightening process compared to a few months ago. Even so, as long as the economy remains strong, the rate hikes will continue, though not at every meeting, until inflation closes in on the desired 2% rate.
When the Fed was in the most aggressive phase of the tightening cycle, many analysts expected a recession in 2023. That has not yet materialized and is looking less likely as time goes on. The labor market remains very strong, and there still seems to be enough money coming back into the market to fuel investment. Low and stable inflation creates a good environment for economic growth. The steady, gradual trajectory back to normal inflation levels has restored confidence in the economy, which has contributed to the positive performance in the first half of the year. With many important corporate earnings reports this week, the forward guidance in those announcements will help us to see what firms expect for the rest of this year and beyond.
Next week: July employment report
