Will US economic growth persuade the Fed to raise interest rates?
The US economy gained momentum in the second quarter after a disappointing first quarter. Although the Federal Reserve said it is keeping interest rates at its near-zero levels, the growth in gross domestic product means the possibility is still on the table.
Gross domestic product grew 2.3 percent, thanks to an increase of exports and drop in imports, the Department of Commerce . While economists predicted the economy expanding around 2.5 to 2.6 percent, the growth is refreshing news after the first quarter鈥檚 sluggish performance. Last quarter鈥檚 GDP, initially reported to dip 0.2 percent, was revised to show it growing at a 0.6 percent rate.
Part of the US economy鈥檚 growth spurt was fueled by consumers. In the second quarter, consumer spending rose 2.9 percent, compared to last quarter鈥檚 1.8 percent increase. However, businesses did not echo consumers鈥� behavior: business investment declined, with equipment spending declining 4.1 percent.
The news also gives the Fed more to think about on whether or not it will raise interest rates. The central bank after the central bank wrapped up its two-day policy meeting that聽it would still stick with its position of keeping interest rates between 0 and 0.25 percent. However, the Fed noted that economic activity had been growing moderately, thanks to household spending increasing and the housing market continuing to improve. In the meantime, people will have to wait and see for more indicators on a decision that affects nearly everyone in America. 聽
Economists and analysts said the Fed鈥檚 upgraded outlook on the economy signals there could be an interest rate hike in September. While the Fed did not give a solid indication of a rate hike, the bank鈥檚 language was more positive about the economy than it was back in June, the Pittsburgh-based PNC Financial Services Group .
鈥淭he previous statement did not make a reference to 鈥榗ontinued鈥� improvement in the labor market, did not describe job gains as 'solid,鈥� and described the unemployment rate as 'steady' and not 鈥榙eclining,'" PNC economists wrote. That said, the timing of an increase depends on data over the next few months.
The economy鈥檚 moderate growth does not provide much ammunition for either side of the Fed鈥檚 rate-hike debate,聽, an economist at Naroff Economic Advisors. The revision to the first quarter helps, but is 鈥渘othing spectacular.鈥� Vehicle spending, an improved housing market, and a narrowing trade聽deficit help boost the economy in the second quarter. Mr. Naroff expects that the US could see the economy growing 3 or more percent over the next quarter, though economists do not have any proof of it yet.
鈥淔or the Fed, the key numbers may be private domestic demand, which is growing solidly, and consumer inflation, which is slowly accelerating,鈥� he wrote. 鈥淓verything considered, this report really doesn鈥檛 add much to the argument over whether the Fed should hike sooner or later. Data over the next two months retain their primary position in the decision process.鈥�
