US' 4.1% rise in GDP clears path for two more Federal rate hikes

The US gross domestic product report for the second quarter will almost certainly cement the case for a September interest-rate increase by the Federal Reserve and keep a December hike in play even though there will be a tendency to dismiss the results due to a burst of soybean exports ahead of retaliatory tariffs imposed by China.
 
What’s important is that the 4.1 per cent rate of growth in the April through June period yields a 2.9 per cent average for the past four quarters, a number that likely better represents the underlying pace of economic expansion than quarterly readings. It is also well in excess of the median Fed policy maker estimate of the potential growth rate, which is 1.8 per cent, but close to the central bank’s 2018 growth forecast of 2.8 per cent.

 
In other words, even after discounting a strong second-quarter number, the trend in GDP growth suggests the economy is close to the Fed’s  expectations. Moreover, it is a pace of activity that promises to sustain rapid job growth sufficient to keep downward pressure on the unemployment rate. Fed Chairman Jerome Powell and his colleagues will not be easily dissuaded from their campaign to push policy rates, currently in a range of 1.75 per cent to 2 percent, to at least neutral in this environment.
 

There has been speculation that a budding global trade war will pressure the Fed to shift to a dovish stance in next week’s Federal Open Market Committee meeting. Indeed, in his recent Congressional testimony, Powell highlighted the additional uncertainties in the forecast due to trade. And some companies are starting to feel the pain. Home appliance manufacturer Whirlpool Corp issued disappointing guidance last week in response to tariff-induced higher material costs, and the US auto industry noted similar negative impacts.