GDP, Inflation Data Bolsters Case that Fed is Done Hiking

Article originally posted on HERE on November 29, 2023

Growth in the US economy continues to surprise to the upside while inflation declines.

New data from the Bureau of Economic Analysis revealed the US economy grew at a 5.2% annualized pace in the third quarter, revised up from the 4.9% reported in the advance estimate a month ago.

The quarterly reading for Personal Consumption Expenditures (PCE) showed core prices, which exclude volatile categories like food and energy, grew at a 2.3% pace during the third quarter, down from an initial reading of 2.4%. The release showed inflation continues to cool towards the Federal Reserve’s long-run goal of 2% inflation.

“The latest GDP release’s downward revisions to PCE inflation will add to the Fed’s confidence that they have raised interest rates enough,” Comerica Bank chief economist Bill Adams wrote in a research note after the release.

Raymond James’ chief economist Eugenio Aleman described the print as a “Goldilocks scenario,”meaning the economy is growing at a solid pace but not too fast that the Fed needs to worry it will be an upside risk to inflation.

That reading comes as recent commentary from Fed Governor Christopher Waller has investors believing interest rate cuts could come sooner than initially expected.

Waller said there was “no reason” that rates must stay “really high” if inflation keeps declining consistently.

“Perhaps [Wednesday’s revision] was the reason why several Fed speakers have been relatively dovish lately and will probably cement the market’s conviction that the Fed is done increasing interest rates this cycle,” Aleman wrote in a research note Wednesday. “This is good news for the economy and for the markets.”

Markets are now pricing in a 78% chance of an interest rate cut by the end of the Fed’s May meeting. A month ago, markets had priced just a 41% chance of a cut in the same time period, per the CME FedWatch Tool.

But just as Goldilocks likes her porridge not too hot or cold, the US economy has a thin margin of error moving forward. As it stands on Wednesday, investors largely believe the Fed is done hiking interest rates and see the central bank’s current policy as restrictive enough to slow growth and cool prices while avoiding recession.

Each new piece of data will be key as the US tries to stay on this path. Monthly PCE, the Fed’s preferred inflation gauge, is set for release on Thursday morning at 8:30 a.m. ET.

Economists expect annual core PCE inflation to have clocked in at 3.5% in October. Over the prior month, economists expect core prices rose 0.2%.