The Red-Hot Economy — a Dilemma for the Fed
Author: Greg Valliere
April 26, 2019
WE’VE BEEN ARGUING that the economy would surprise to the upside this year, but the 3.2% first quarter GDP report, just released, was quite a revelation — considering the government shutdown and terrible weather this winter. The data was inflated by inventory accumulation, but there’s little doubt that the second quarter has begun with quite a head of steam.
GDP GROWTH THIS YEAR OF 2.5% still seems like a very low bar to clear, and obviously the absurd recession fears have been demolished. We reiterate our theme: the greatest economic risk is over-heating. What if next Friday’s unemployment report shows the jobless rate falling from 3.8% to 3.6%? What if wages begin to surge? This could pose quite a dilemma for the Federal Reserve, which wants to stay accommodative.
A RATE CUT obviously is now totally out of the question, despite demands from President Trump and his economic adviser, Larry Kudlow. The central bankers could face growing pressure by late this year to hike rates, especially if inflation inches higher, which seems likely.
BUT FOR NOW, WE ANTICIPATE SEVERAL MORE MONTHS of a Goldilocks environment, with modest inflation, a red-hot labor market, decent corporate earnings and interest rates rising gradually. The economy will stay strong not just because of monetary policy — but because fiscal policy is extraordinarily stimulative and will stay so for the foreseeable future as Washington embraces a spending binge.
TODAY’S REPORT OBVIOUSLY IS GOOD NEWS FOR TRUMP, who had a rocky April, to put it mildly. His re-election prospects slipped in the past few weeks, but if the economy continues to grow at close to 3% — with no recession in sight — the country may shrug off the Washington dysfunction and vote based on the economy, as usual.
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