Second Half GDP Will Help Decide Rate Hike Timing

By Economic IndicatorsFOXBusiness

A slight upward revision of second-quarter GDP on Friday gives the Federal Reserve a bit more justification for raising interest rates later this year.

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In a speech on Thursday, Fed Chair Janet Yellen said she and “most other” central bank policy makers “anticipate” raising rates before the end of 2015. Yellen cited the growing strength of the U.S. economy while making the case for hiking rates sooner rather than later, and an upward revision of last quarter’s gross domestic product can only contribute to that line of thinking.

The U.S. economy expanded at a seasonally adjusted annual rate of 3.9% in the second quarter, according to the Commerce Department, slightly higher than the government’s second estimate of 3.7%. Friday’s final reading of second-quarter GDP beat the Thomson Reuters estimate of 3.7%.  The increase was driven by strong consumer spending and exports.

Stock markets Friday cheered the upward GDP revision as well as the apparent clarity provided by Yellen’s speech on Thursday. The Dow Jones Industrial average rose more than 200 points in morning trading.

The concern now is growth moving forward.

When the Fed decided to delay raising rates at their meeting last week, members of the policy setting Federal Open Markets Committee cited signs that the Chinese economy was slowing and concerns that China’s malaise could spread to emerging markets across the globe.

The dramatic plunge recently in energy prices, a strong dollar and surpluses of other commodities could also dampen economic growth worldwide, which will inevitably have an impact on U.S. growth.

“An upward revision to third quarter GDP is welcome news but has little bearing on US policy: it does little to change the story that the economy rebounded strongly in the spring after the weak patch seen earlier in the year,” said Chris Williamson, chief economist at research firm Markit. “More important are the forward-looking indicators, which include a number of red flag warnings that growth is slowing amid headwinds of the strong dollar, slumping oil prices, financial market volatility and emerging market jitters.”

Williamson suggested that the cloudy growth forecast would “play into the hands of dovish policymakers” and “reduce the odds of interest rates rising any time soon.”

But that prediction runs counter to Yellen’s message on Thursday. The Fed chief laid out an elaborate case for raising rates before the end of the year, notwithstanding headwinds due to weakening overseas growth.

Reiterating positions she and other policy makers have stated on numerous occasions in recent months, Yellen said she is confident that a tightening job market is raising wages, which will eventually push inflation higher toward the Fed’s 2% target rate.

Though the material in Yellen’s speech wasn’t new, the timing of the speech was surely intended to provide additional clarity to markets that have veered up and down in the wake of the Fed’s decision to delay last week, a decision many said contributed to a sense of uncertainty that had led to earlier volatility.

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