GDP, Interest Rates, and YOU

Submitted by DoomerGloomerBloomer t3_yex0sw in wallstreetbets

So, the advance GDP report for Q3 2022 dropped this morning and it was a pleasant surprise...or was it?

Q3 GDP is 2.6% which is remarkable economic growth. The technical recession that the US was in during Q1 - Q2 is over. That's cause for applause, no?

Depends how you're thinking about this.

The federal funds interest rate is currently 3% to 3.25%. Average mortgage rates are in the 7% range and expected to keep going higher.

Politicians on both sides have been cursing the fed and current administration for "causing economic damage" but this is objectively nonsense.

Inflation in the US is still 8.2% and unacceptable by Jerome Powell's standards and the standards of pretty much anyone else with a pulse.

So what does a GDP growth rate of 2.6%, interest rates of 3%, and an inflation rate of 8.2% tell you about the path of monetary policy?

This means, in simple terms, that higher interest rates are NOT damaging the US economy. Therefore, with inflation still remaining well above the target of 2%...

...THE FED WILL NOT PIVOT.

Equities will continue to remain under pressure as the relationship between interest rates and equity prices are inverse.

The market relief rally will be short lived. If you're thinking that interest rates will be coming down soon because of the "fed pivot"...you will be sorely mistaken.

TL:DR - interest rates go higher because economy still growing big n' strong. Stonk go down until inflation go down. 🦧

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5

KenBalbari t1_iu0r41e wrote

The other big piece of this though, is PCE inflation came in at 4.2% for Q3. And Core PCE, excluding food and energy, the main measure the Fed actually uses for their target, was at 4.5%. That's down from 4.7% in Q2, and 5.6% in Q1.

So if core inflation continued to fall, even as unemployment remained 3.5% and real GDP grew at 2.6%, then maybe there's not a need to cause too much more pain.

And Personal Consumption Expenditures grew at a 5.7% annualized rate in the quarter. So if you are worried about inflation driven by excess consumption demand, well with 2.6% real GDP growth, that consumption growth would still be roughly consistent with only a 3.1% inflation (5.7-2.6) rate.

But overall, I don't think this alters the Fed's course any. These numbers are roughly consistent with their projections from the September meeting, so their median forecast for the Fed Funds rate peak of 4.6% in 2023 still seems applicable.

So yes, still more pain ahead. And no pivot. They'll likely still need to get to 4.2%-4.9% or so and then hold it there a couple of years. But if you got those rates to 4.5%, while that core PCE inflation rate fell to ~3%, that would also still only be a moderately contractionary policy.

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VisualMod t1_iu0cug6 wrote

>It is clear that the current monetary policy is not sustainable in the long term. The Fed will eventually have to pivot and begin raising rates in order to control inflation. This will put downward pressure on equity prices, so investors should be cautious in the short-term.

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Thetagamer t1_iu0dk34 wrote

interest rates rising won’t have an immediate impact on GDP & inflation… it takes more than a couple months to see the results lol

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VisualMod t1_iu0ctqf wrote

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>TL;DR: Interest rates are going up because the economy is still growing, but inflation is high. Stocks will go down until inflation goes down.

1

wirmyworm t1_iu0kx35 wrote

Housing is gonna go down hard next year. But the the fed will want to make inflation come down. They'll want to raise rates futher until unemployment claims go way up to cooldown consumer spending. This will make Housing even more expensive, consumer spending is going down though. So the increase in economic activity (gdp) could be because gas prices are down from earlier in the year. I don't know how next quarter things will look, feels like a truck going too fast to stop, and will stop via a giant explosion.

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