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September 23, 2022

Fed Hike And GDP:

Battle For The Spotlight

As expected, the Fed hiked its benchmark Fed Funds Rate by an aggressive 75 basis points at its meeting last week, which is the second time the Fed has hiked by 75 basis points in almost 30 years. You may recall that the Fed hike resulting from the  June meeting was also 75 basis points. Note that the Fed Funds Rate is the interest rate for overnight borrowing for banks and it is not the same as mortgage rates. The main tool the Fed uses to curb inflation is hiking its benchmark Fed Funds Rate, so counterintuitively Fed rate hikes can be good for mortgage rates if they’re perceived to curb inflation.

During his press conference, Fed Chair Jerome Powell said that another “unusually large increase could be appropriate” at their meeting in September. This will depend on the data received between now and then, specifically from the July and August Jobs Reports and inflation numbers.

Speaking of inflation numbers, Personal Consumption Expenditures (PCE), showed that inflation rose a hotter than expected 1% in June. The year-over-year reading rose from 6.3% to 6.8%, which was the highest reading since 1982.

The biggest talking point of last week, almost muting the Fed meeting, was the first reading of second-quarter GDP, which came in at  -0.9%. This follows the -1.6% final reading that was reported for the first quarter. While it’s possible that the reading for the second quarter may be revised when the second and final readings are reported on August 25 and September 29 respectively, as of now we do have two consecutive quarters of negative GDP.

You've likely heard that two consecutive quarters of negative GDP is "not the official definition of recession". While word games are being played, know that we have never had successive quarterly declines in real GDP without the National Bureau of Economic Research (NBER) officially announcing one. The NBER will ultimately make the call regarding whether we’re in a recession and they may wait to see some increases in the unemployment rate before doing so. Recession or not, growth has slowed notably this year and is continuing to do so in the third quarter as well.

Looking ahead, the first full week of August means crucial news from the labor sector. Tomorrow, the latest Jobless Claims data will be reported while Friday brings the Bureau of Labor Statistics Jobs Report for July, which includes Non-farm Payrolls and the Unemployment Rate. Note that ADP announced they are retooling their Employment Report, which measures private sector payrolls, so that report will not be released this week.

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