Third-quarter economic growth figures released yesterday by the Commerce Department contained some surprisingly good news. But the good news is bad news as it is likely to bolster the Fed’s resolve to hike rates by another three-quarter point when our central bankers meet again next week. This will be the fifth such rate hike.
First the good news:
After a slowdown in the first two quarters, the economy has returned to growth and is growing at an annual rate of 2.6 percent, so we are nowhere near a recession. Another piece of good news was the fact that virtually all of the growth came from increased US exports.
Part of this export gain reflects transient factors such as B. the increased demand from abroad for more US energy. But industrial exports also increased slightly. And this hints at the wisdom of Biden’s Made in America policy. The more we produce in America, the more we will export, and that’s good for both jobs and overall economic performance. The export gains are all the more surprising in view of the overvalued US dollar.
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Another bit of good news was buried far down the report, almost in passing. The inflation rate fell more than expected. Core purchases of the personal consumption spending index rose 4.5 percent in the third quarter, down from the first two quarters.
This slowdown in prices suggests that inflation is moderating, reflecting both improving supply chain factors and falling energy prices, as well as the dampening impact of the Fed’s past rate hikes. As a number of economists have warned, these rate hikes will take time to ripple through the economy. And declining inflation is another sign that price increases are not being driven by wage increases.
The Fed risks acting too quickly before its previous rate hikes have had their full effect. An ominous indicator was the huge drop in housing investment, which fell by an annualized 26 percent. This is a key consequence of the Fed’s tightening monetary policy, which is increasing financing costs for both builders and homebuyers.
Average mortgage rates, which were below 4 percent prior to the Fed’s rate-hiking frenzy, are now above 7 percent — and this at a time when there is a shortage of affordable housing. This consequence suggests why raising interest rates is such a blunt tool to combat inflation, particularly the kind of inflation as atypical and non-demand-driven as this.
Another bit of good news: Other central banks, forced by the Fed’s tightening policy to raise their own rates to defend their currencies, are already easing monetary policy. Canada’s central bank hiked its core interest rate by just half a point instead of three-quarters of a point, less than expected. And the European Central Bank, citing recession risks, signaled that future rate hikes are also likely to be smaller.
It remains to be seen when the Fed will follow suit and conclude that the era of economic strangulation is over.
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