A Rate Hike Amid Modest Growth Expectations?

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The Atlanta’s Fed’s GDPNow model raised its outlook for US economic growth in the third quarter to 1.5% in yesterday’s update (Sep 15). That’s still a sluggish pace, but it beats a kick in the head. Alas, it still falls short of a clear signal for raising interest rates, which is potentially on the agenda at the Fed’s policy meeting, which concludes with tomorrow’s statement and press conference.

Meantime, a question: will Yellen and company launch the first rate hike in a decade with expectations for Q3 growth bumbling along at a tepid 1.5%–more than half the pace of Q2’s strong 3.7% rise? Probably not, although it’s worth pointing out that the Fed’s last quarterly update is looking for relatively stronger growth in 2016. June’s central tendency forecast for US GDP next year anticipates a 2.4%-to-2.7% increase–a sizable premium over what the GDPNow model’s looking for when the Bureau of Economic Analysis publishes the “advance” Q3 GDP report on Oct. 29.

gdpnow.16sep2015

Of course, if you’re looking for an upbeat economic forecast, it pays to shop around. Last week’s Q3 GDP estimate from Wells Fargo, for instance, isn’t much higher than the GDPNow projection, although next year’s numbers also offer more traction for optimists by way of quarterly growth rates in the upper-2% range. No wonder that the bank’s economics team has a hawkish bias about tomorrow’s rate decision, arguing that “we feel the data continue to support a move.”

As for the current quarter, economists overall have a brighter outlook for Q3 relative to that pesky GDPNow model. The Wall Street Journal’s survey data for September has an average 2.4% estimate for GDP growth in the August-to-September quarter–a moderate but respectable edge over the GDPNow forecast. But wait–it gets better, at least for a while. The Journal’s survey anticipates that growth will accelerate to 2.8% in Q4 before ticking back down to 2.5% in next year’s first quarter.

But in a world awash in forecasts (some of which may actually be correct), the main event for the immediate future is how the Fed’s new and improved guesstimate compares. With that in mind, keep your eye on tomorrow’s revised projections for this year’s GDP growth for all of 2015 as well as assumptions for 2016. Will the monetary mavens cut June’s outlook for growth from the low-to-mid 2% range? If they do, it’ll be hard to rationalize a rate hike.

According to estimates by Mark Zandi, chief economist of Moody’s Analytics, even a quarter-point hike would take a toll, if only slightly. “It would have a meaningful but modest effect on growth,” he says.

Modest doesn’t sound all that threatening, but it’s all about relativity at this stage. The problem is that the growth trend overall is modest–again–and so there’s not a lot of cookies in the cupboard to spare. The future will be brighter, or so we’re told. But given what we know about forecasting, it’s still reasonable to use the hard data in hand as a rough proxy for what’s coming. By that standard, the case for a rate hike is still on thin ice.

Source: A Rate Hike Amid Modest Growth Expectations?

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Hey, Im Joshua, the founder of CNA Finance. I enjoy following the trends in the market and finding the catalysts that are making the moves. If you want to get in contact with me, leave a comment below or email me at CNAFinanceHelp@gmail.com Please keep in mind that I am not an investment advisor and nor is CNA Finance. This is a news and information gathering outlet. We may work directly with some of the companies that we write about. If we have a business relationship with an issuer, we will mention that in the articles. We also have various affiliate relationships with advertisers and may be paid if you sign up for a service that you were referred to through our website.

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