"Are We There Yet?" GDPNow for Q3 Tells Policymakers Official Rates Need to Go Higher
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Are we there yet? Incoming information on the economy tells policymakers they have not achieved economic conditions (below-trend growth and slack in the labor markets) to ensure inflation continues to slow. And that spells bad news for investors because policymakers have indicated that slowing inflation alone is not a sufficient reason to prevent additional rate hikes.
At the July 25-26 FOMC meeting, policymakers stated that "a period of below-trend growth in real GDP and some softening in labor market conditions as needed to bring aggregate supply and aggregate demand into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time."
Tightness in labor markets has lessened somewhat, but a 3.5% jobless rate in July tells policymakers that they are far from a situation in which there is enough slack in labor markets to limit wage and price pressures.
Yet, the economy's current growth performance is a more immediate concern to policymakers, especially after raising official rates over 500 basis points and expecting the lagged effects from higher rates to result in slower growth.
GDPNow, published by the Federal Reserve Bank of Atlanta staff, offers a running assessment of current quarter GDP growth. The GDPNow model uses much of the same source data that BEA, the government agency responsible for estimating GDP. But GDPNow differs from the old GDP flash report, which BEA prepared because it does not use detailed or imputed data in the official estimates, so it can overstate and understate growth for any particular quarter. Nonetheless, it has credibility since a Federal Reserve Regional Bank published it.
The latest estimate posted on August 16 shows Q3 GDP running at a 5.8% annualized rate, roughly three times above consensus estimates and far above what the Fed considers trend growth. The latest estimate only includes preliminary data for July, so two-thirds of Q3 economic activity is missing. Regardless of what's missing, it sends a message of strong and broad economic momentum in the early part of Q3.
Even if the final Q3 growth number ends half as fast as the August 16 GDPNow estimate, it should tell policymakers the lagged effects of when rising official rates run below inflation are much less, or even non-existent, as when rising official rates are above inflation. And the current stance of monetary policy is even less restrictive than advertised, given the level of QE.
So the level of official rates needed to slow the economy has yet to be reached, and whatever level policymakers or investors thought was appropriate should be raised by 100 basis points or more because of QE.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.