Will a Slowing US Economy Curtail Future Rate Hikes?

On Thursday, August 26, the Commerce Department reported that while the US economy is shrinking, it is not declining as much as previously reported. In a revised report, the Fed announced that the US GDP — a broad measure of overall economic growth — declined at a 0.6% annual rate for the second quarter of 2022, slightly better than what was reported. When the second quarter data was first published in July, the Commerce Department noted a decline of 0.9% in the US GDP.

It is common for government agencies to issue revised reports on economic data due to the complexity of the data and the multitude of sources. It also enables the agencies to parse the data and take a deeper look into what factors are contributing to the overall results.

The revised report noted that consumer spending, which accounts for 70% of US economic growth, grew 1.5% for the second quarter. During the same period, government spending and business investment declined. The largest decline came in housing, as rising interest rates contributed to a decline in home construction of 16.2%.

The decline of the US GDP for the second quarter of 0.6% follows a first quarter drop of 1.6% in the first quarter. The two consecutive quarters of decline in the GDP indicates a technical recession; however, many economists feel that the overall economy still remains robust.

The importance of whether the economy is in a recession or not is at the heart of the debate on the Federal Reserve’s stated policy of needing to raise interest rates throughout 2022 to dampen a hot US economy that has caused inflation rates to spike.

With signs that the economy is cooling, many investors believe that the Fed may need to curtail interest rate hikes in an effort to avoid pushing the economy into a recession. The prospect of the Federal Reserve moderating future rate hikes was greeted as good news on Wall Street, causing the S&P 500 to regain losses for the year on hopes that inflation has peaked.

Despite such optimism, the Federal Reserve continues to show no signs of altering course. Without a doubt, the question on the minds of investors will be if the economy is slowing enough to warrant curtailing future rate hikes?

Please note that all of the material provided in these postings are informational and subject to change. Nothing provided should be used as investment advice or as a basis for any investment decisions.

Please note that all of the material provided in these postings are informational and subject to change. Nothing provided should be used as investment advice or as a basis for any investment decisions.