US Q2 GDP: Enough to sustain higher interest rates – Wells Fargo

Today’s Q2 GDP data showed that the economy expanded at a 4.1% rate. According to analysts from Wells Fargo, the 2.2% growth rate year-over-year is enough to sustain higher interest rate from the Federal Reserve.  

Key Quotes:  

“Despite the headline GDP number, we focus on real final sales as a measure of sustainable economic growth over time (…)  This benchmark came in at a 2.9 percent year-over-over gain. This will support the outlook for 3 percent-plus growth in 2018 and continued Fed policy to raise the funds rate in September.”

“Real consumer spending rebounded, as expected, at a 4.0 percent pace, with gains in durable and nondurable goods as well as services. Helping the consumer is a healthy labor market, rising disposable income due to tax cuts, improved consumer confidence and the wealth effect of higher home and equity prices. Ahead, rising inflation will limit real income gains, and higher interest rates may already be impacting housing markets.”

“With the year-over-year change in the personal consumption expenditures (PCE) deflator (2.2 percent) as well as the core PCE deflator (1.9 percent) up relative to the past four quarters, the case remains for the Fed to raise the benchmark funds rate. Service prices rose 2.5 percent in Q1.”

“The Fed is likely to follow the inflation numbers and raise rates in September while also reducing its balance sheet. We will watch for other signals where higher rates make a difference and hint at the possibility that the Fed will alter the path of rates implied in its dot plot.”