Robust US economic growth presents dilemma for Federal Reserve: Report

The United States is witnessing the most substantial economic expansion in nearly two years, fuelled by a resilient job market, increasing wealth, and easing inflation. Gross domestic product (GDP) is anticipated to have surged at an annual rate of 4.5 per cent in the third quarter, more than doubling the pace of the prior period, Bloomberg reported. This news comes as a surprise, particularly due to the Federal Reserve's expectations of a slowing consumer demand.

Bloomberg quoted Elie Maalouf, CEO of InterContinental Hotels Group, as saying, "The US consumer has been surprising most predictions, including the Federal Reserve predictions, which is almost looking for the US consumer to soften, and yet they don't."

For President Joe Biden, this economic boom is welcome news, demonstrating the success of his economic policies. However, it also presents a dilemma for the Federal Reserve. Since March 2022, the central bank has been aggressively raising interest rates to combat inflation while avoiding a recession. While inflation has eased with improvements in global supply chains and a decrease in disruptions due to the war in Ukraine, domestic demand in the US remains strong, defying the Fed's efforts.

Federal Reserve Chair Jerome Powell has indicated that policymakers are likely to maintain interest rates at their current levels during the upcoming meeting. Still, the door is open to future increases if strong growth continues. According to Bloomberg, JPMorgan Chase & Co. chief economist Bruce Kasman remarked, "He may not have a lot of patience if the growth numbers don't cool pretty quickly here."

Powell acknowledges that growth is expected to slow in the fourth quarter and into the next year, with economists projecting GDP to expand at an annual rate of just 0.7 per cent in the current quarter. The challenge is that the economy's resilience has taken many, including the Fed, by surprise.

Consumer spending experienced a significant boost in the third quarter, driven by solid wage gains and receding inflation. The surge in household wealth, stemming from increases in home and equity prices, likely also played a role in boosting consumption. However, some experts consider this surge to be temporary. Bloomberg cited Yelena Shulyatyeva, a senior US economist at BNP Paribas SA, who said that the boost could be temporary.

There are factors that may not repeat in the final quarter of 2023, such as a projected decline in imports and a rise in inventories. Additionally, an upswing in mortgage rates and other headwinds could dampen the economy's performance in the near future. As Mark Zandi, chief economist at Moody's Analytics, pointed out, growth may slow to around 1 per cent this quarter, after a strong performance of 3.8 per cent in the third. A more stable unemployment rate would be favourable for the Federal Reserve.

(Inputs from Bloomberg)

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