via notayesmanseconomics:
Last night the US Federal Reserve gave its latest policy statement on US interest-rates. That is significant in itself but it has an additional importance in that due at least partly to the changes in economic policy started by President Trump we are more than usually aware of the flaws in using GDP as an economic measure. I covered the problems with the US GDP release on the second of this month but making an adjustment for trading in Silver was both unexpected ( Gold seemed more likely) and being something that is likely to end up going wrong. Also since then there has been a focus on another problematic area for the official release.
Nomura: Detailed GDP data showed that the BEA boosted nondurable inventories to account for the unusual surge in consumer goods imports (Fig. 8). It is unclear if the BEA will continue with this atypical adjustment for inventories, which adds uncertainty to Q1 and Q2 GDP prints. ( Neil Sethi)
Thus I am even more sure that Diana Ross was right.
Do you know where you’re going to?Do you like the things that life is showing you?Where are you going to?Do you know?
The Federal Reserve Announcement
This had as much to do with politics as economics as Jerome Powell responds to the criticism of his policies by President Trump.
In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent.
That is reinforced by the words of Federal Reserve Chair Powell.
“I don’t think it’s up to a Fed Chair to seek a meeting with the President. I think it always comes the other way. A president wants to meet with you, but that hasn’t happened.” ( @CalltoActivism )
It seems that The Donald is in no mood to back down.
“We have a stubborn Fed,” Trump said in a television interview that aired Sunday. “He should lower them. And at some point, he will.” ( Wall Street Journal)
As an irony it was the right decision but it was framed with a rather odd statement.
Although swings in net exports have affected the data, recent indicators suggest that economic activity has continued to expand at a solid pace.
As so often that depends where you look and on the positive side there is this.
The GDPNow model estimate for real GDP growth (seasonally adjusted annual rate) in the second quarter of 2025 is 2.2 percent on May 6, up from 1.1 percent on May 1.
As I looked at this on the second of this month here are the reasons for the upgrade.
After recent releases from the US Bureau of Labor Statistics, the US Census Bureau, and the US Bureau of Economic Analysis, the nowcasts of second-quarter real personal consumption expenditures growth and real private fixed investment growth increased from 1.9 percent and 1.3 percent, respectively, to 3.3 percent and 3.6 percent.
Firstly the release comes with a “blue-chip consensus” which has remained at 0.9% annualised. That may well be because they are troubled by the reliance on consumption and investment numbers which look to have been affected by the imports surge as I explained on the second of this month.
On the other side of the coin we were told this on the fifth of this month.
In April, US service sector business activity growth was the
slowest in nearly a year-and-a-half, according to the latest
PMI® data from S&P Global…….. However, with the
index dropping to 50.8, the lowest reading since November
2023 and down from 54.4, growth was marginal and much
slower than March’s three-month high.
We know central bankers are keen on the PMI numbers and it showed quite a sharp fall or the opposite of the Federal Reserve claim. Switching to my own thoughts I am more sanguine about the use of PMIs but a drop of more than 3 big figures in the measure means they have likely picked up a change.
Also in the Federal Reserve statement we were told this.
The Committee is attentive to the risks to both sides of its dual mandate and judges that the risks of higher unemployment and higher inflation have risen.
So “solid pace” ? Also it poses a challenge to something it had claimed only a couple or so of sentences before.
The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid.
So solid a labour market that the risks of higher unemployment have risen?
The Press Conference
The main theme here was highlighted by the Wall Street Journal.
“If the large increases in tariffs that have been announced are sustained, they’re likely to generate a rise in inflation, a slowdown in economic growth, and an increase in unemployment,” Fed Chair Jerome Powell said at a news conference.
So more trouble for the “solid growth” claim in the statement. There was also some interesting framing from Nick Timiraos who is a regular Fed mouthpiece.
The policy changes pose a dilemma for the Fed, which has to decide whether to focus more on the potential for inflation to go up or more on the risk of rising unemployment.
Usually that is no problem at all for central bankers who will use open mouth operations versus inflation and policy changes versus unemployment risks.If we look at their track record it seems unlikely that this chap actually gave that sort of advice, or if he did it was ignored.
“They’re in a bad situation,” said William English, a former senior Fed adviser. “If I were there, I would be suggesting that they stay put for now.” ( Wall Street Journal)
Past Problems
Fed Chair Jerome Powell rather tripped over his own feet here by in an irony saying something that I agree with 100%.
Powell: The 2024 rate cuts weren’t preemptive. “If anything, it was a little late.” ( @NickTimiraos)
Actually more than a little late for the economy but not for something else so let me repeat my words from September 19th last year.
But I seem to be rather alone in arguing for the point that central banks should avoid making moves at election time.
Remember at that time we were also guided towards this.
So a total of 0.5% is expected in 2024 and due to the election it seems logical to do that in December.
In spite of the fact that we were also told this.
I would just say that you know the US economy is in a good place and our decision today is designed to keep it there.
So good in fact it needed a 1% interest-rate cut comprised of 0.5% there and then and 0.5% promised for the future.
UK Trade Deal
Details are sketchy at the moment but it looks as if a UK-US trade deal is about to be announced.
Just in: Donald Trump plans to announce a new trade pact with the UK on Thursday, in what could make Britain the first country to ease tariff tensions with the US. ( @ft)
That is likely to be very significant for the UK, but for today’s purposes suggests a lowering of tariff risks is on the way as presumably other deals will follow.
Comment
We have a Federal Reserve which I think has done the right thing but for the wrong reasons. Let me welcome it but also provide a warning because if we get better news on tariffs and trade deals then the US Federal Reserve will return to interest-rate cuts.