Is a June rate hike around the corner? In today’s post we take a look at the state of the US economy and how it may influence the Fed.
GDP growth was reported at a seasonally adjusted 0.7 percent, well below the 1.2 percent in the Thomson Reuters consensus forecast. This is the weakest quarterly pace in three years. It also fell short of CNBC/Moody’s Analytics Rapid Update tracking rate, which was updated Thursday to 0.8 percent, the same as this time last year. This bad news follows several reports on CPI, jobs, and retail sales that were weaker than expected. Economists do not believe, however, that this is necessarily indicative of trouble on the horizon. Many believe that the setbacks are temporary and that growth will catch up in the second quarter.
Measured by the personal consumption expenditures price index, the rate of inflation increased at a rate of 2.4 percent. This was the largest single jump since 2011. The employment cost index, another indicator for inflation, also increased 0.8 percent quarter over quarter. This was 0.2 point more than projected. “Bottom line, the ever elusive evidence of rising wages might finally be peaking its head above water,” Lindsey Group Chief Market Analyst Peter Boockvar wrote to clients.
“The inflation numbers accelerated, but they still remain moderate. It supports the contention that the Fed is attaining its objective on the inflation side,” said Ward McCarthy, chief financial economist at Jefferies. The Fed has targeted inflation at two percent, and forecasts two additional rate hikes in 2017. Many economists believe that the Fed should proceed as planned, as they are projecting improvement in GDP growth in the second quarter. Some forecast growth at 3 percent or more. There will be cause for concern, though, if growth does not improve but the Fed moves forward with a rate hike due to increasing inflation.
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