Today’s upward revision in the pace of growth in first-quarter GDP shows the economy expanding at its fastest rate in more than two years. That should give the Federal Reserve something to talk about as it ponders what to do at its next monetary policy meeting on June 28-29.
Bernanke and company keep reminding that they need more data to make an informed decision on the next move (if any) on interest rates. By that standard, can we assume that the Fed is now one step closer to putting the pause on pause and raising Fed funds next month?
Last month, when the first guess of 1Q GDP was dispatched (the “advance” estimate, as it’s known), we were told that the economy grew by a robust annualized 4.8%. Today, we learn that GDP was rolling along at a materially faster pace: 5.3%. The “primary” reasons for the upgrade, the Bureau of Economic Statistics says, was a higher increase in inventories and stronger exports that initially estimated.
In any case, an economy growing by 5.3% is an economy that’s expanding at a rate that exceeds the current Fed funds rate by more than a trivial gap. Perhaps it’s time to rethink if the central bank’s monetary policy is at or near a state of neutrality. Even if the Fed were to elevate rates by 25 basis points come the end of June–as it’s been doing at every FOMC meeting since June 2004–Fed funds would still be trailing GDP’s pace for the first three months of this year.
But as any dismal scientist will tell you, GDP reports–even upwardly revised ones–are yesterday’s news, or, more precisely, the previous quarter’s news. The question is whether the obviously strong first quarter momentum will spill over into the second quarter and (dare we ask it?) the third quarter? On that all-important question the jury is out, at least when it comes to trying to forge a consensus. And since the first guess at second-quarter GDP doesn’t arrive until July 29, the opportunities for conjecture are wide open on matters economic.