The latest estimate of gross domestic product in the third quarter came out stronger than expected, rising by 3.1% instead of 2.8%, according to government data released on Thursday. Upward revisions to personal consumption, trade and government spending drove the gains.
The labor market also showed strength with initial jobless claims falling by a sharp 9.1% last week to 220,000 as the seasonal fluctuations subsided.
There are not a lot of reasons for the Federal Reserve to rush cutting interest rates at the moment as growth is much higher than the long-term trend of 1.8% and as inflation shows signs of picking up.
We anticipate the Fed to pause its rate cuts in January as it recalibrates the policy rate path. More than anything it needs to assess the scale and scope of the new administration’s fiscal policies that will most likely have an inflationary effect on the economy.
Looking at the Summary of Economic Projections released on Wednesday, we think it marked the first time in a long while that the Fed has looked further into the future and factored potential economic changes into its forecasts.
Even though there remains a level of uncertainty around the impact of new fiscal policies over the next four years, those are most likely endogenous shocks that the Fed can always model, unlike exogeneous shocks like the war in Ukraine or the disruption of the global supply chain that were much more difficult to assess.
