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Stronger US GDP adds wrinkle to Fed rate increases

By HENG WEILI in New York | chinadaily.com.cn | Updated: 2022-12-01 12:35

The US Federal Reserve building is pictured in Washington, March 18, 2008. [Photo/Agencies]

The economic situation in the US 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 Wednesday in a speech to the Brookings Institution think tank in Washington, noting 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."

Still, 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."

Gross domestic product increased at a 2.9 percent annualized rate, the US Commerce Department said 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.

Raymond Hill, a senior lecturer in finance at the Goizueta Business School of Emory University, told China Daily, "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)."

Hill said that "it seems that a majority of the members of the FOMC (the rate-setting Federal Open Market Committee) had the opinion that future rate increases will be smaller. However, the FOMC members were also clear that there were few signs of inflation abating sufficiently," he said.

The Fed's response to the sharpest rise in US inflation in 40 years has been a similarly abrupt increase in interest rates. With a half-percentage-point 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 percent-4.50 percent range, the swiftest change in rates since former Fed Chair Paul Volcker was battling 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.

"The argument in favor of a 50-point rise is that the GDP numbers represent backwards-looking information, and more current data from the housing market and some other sources point to a slowdown," he said.

"In any event, the Fed is still playing catch-up after severely missing inflation forecasts earlier in the year, and the situation they are trying to deal with is very muddled," Hill concluded.

Stocks rallied on Powell's comments. The S&P 500 finished up 3.1 percent 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," said Hank Smith, head of investment strategy at Haverford Trust, to 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."

Despite the rosier GDP outlook for the third quarter, private employment increased by only 127,000 jobs in November, the smallest gain since January 2021, the ADP National Employment report showed on Wednesday. Economists had forecast private jobs increasing 200,000.

The housing market has been under heavy pressure, with residential investment contracting for six straight quarters, the longest such period since the housing market collapsed in 2006, attributed to surging mortgage rates.

Consumer and business confidence are falling, which could hurt spending and reduce job growth, which is gradually slowing.

The ADP report, jointly developed with the Stanford Digital Economy Lab, was published ahead of the US Labor Department's Bureau of Labor Statistics' more comprehensive and closely watched employment report for November, which will be released Friday.

Nonfarm payrolls likely advanced by 200,000 jobs in November, according to a Reuters survey of economists, significantly below the 261,000 jobs created in October.

Another report from the Commerce Department on Wednesday showed the trade deficit in goods jumped 7.7 percent to $99 billion last month. Goods exports dropped 2.6 percent to $173.7 billion.

There were decreases in the US export of industrial materials and supplies, which include crude oil. Exports of consumer goods tumbled, but shipments of food, and motor vehicles and parts increased. The Fed's rate increases have boosted the dollar, making American goods more expensive on the international market.

"Trade will likely be modestly negative for growth through the rest of the year and in 2023 as slowing global growth and a deteriorating global economic outlook weigh on exports," said Abbey Omodunbi, a senior economist at PNC Financial in Pittsburgh.

But perhaps in a sign that shows how unpredictable this economy is, the Atlanta Federal Reserve Bank, which calculates a real-time GDP number with its GDP Now forecast, sees the economy growing 4.3 percent in the fourth quarter.

Reuters contributed to this story.


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