Federal Reserve gets some respite from GDP numbers

The U.S. economy has presented a set of data that brings a semblance of relief to the Federal Reserve, amid its ongoing battle against inflation and economic downturns. The third-quarter gross domestic product (GDP) growth rate and inflation figures, both key indicators of economic health, were revised to show slower growth and inflation than initially reported. This new data, suggesting a potential for a “soft landing,” supports the Federal Reserve’s inclination towards interest rate cuts in 2024, a move that would mark a significant shift in its current monetary policy.

According to the final report released by the Commerce Department, the U.S. GDP grew at an annualized rate of 4.9% from July to September, a slight decrease from the earlier estimate of 5.2%. This adjustment aligns with the department’s initial calculation, deviating from the expectations of economists who predicted the GDP rate to remain steady. Additionally, the core personal consumption expenditures price index, a measure closely monitored by the Federal Reserve, rose by 2% last quarter, which is lower than the 2.3% forecast by economists.

Economic Indicators Align with Federal Reserve’s Goals

This latest economic data is seen as reinforcing Federal Reserve Chair Jerome Powell’s recent pivot toward easing monetary policy. Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, described the data as “an impressive print” consistent with the Fed’s target. The Federal Reserve, which has been facing the daunting task of curbing inflation without triggering a recession, may find these figures to be a conducive environment for implementing rate cuts next year.

The report on the GDP and inflation numbers arrived alongside other encouraging economic indicators. The Labor Department’s recent data showed a marginal rise in new claims for unemployment benefits last week, suggesting that the economy is regaining some momentum as the year concludes. Other data indicating an uptick in economic activity include unexpected rises in retail sales in November, along with increases in single-family housing starts and building permits, reaching 1-1/2-year highs.

The Balancing Act of Monetary Policy

The Federal Reserve, in its pursuit of cooling down the economy and bringing inflation under control, has raised interest rates significantly since March 2022. However, the recent data suggest that the aggressive monetary policy tightening may be nearing an end, with lower borrowing costs anticipated in 2024. This change in direction comes as inflation appears to be aligning more closely with the Federal Reserve’s target of 2%.

Economists and market analysts will be closely observing the labor market data in the coming weeks, particularly the number of people receiving benefits after an initial week of aid, as it could provide further insights into the labor market’s health in December. The continuation of claims data, which has shown a slight increase since mid-September, is largely attributed to seasonal fluctuations and the lingering effects of the COVID-19 pandemic.

In summary, the Federal Reserve appears to be receiving some breathing room from the latest GDP and inflation numbers. The data not only align with the central bank’s objectives but also provide a foundation for potentially easing its monetary policy in the coming year. While risks to the economy persist, especially in manufacturing, the recent loosening in financial conditions and the decline in inflation are supportive of continued, albeit subdued, economic growth into the next year. This delicate balance of maintaining economic growth while controlling inflation remains a pivotal challenge for the Federal Reserve as it navigates through these changing economic conditions.