The Federal Reserve had expected to push rates higher in 2016 following a rate hike from 0.25 to 0.5% in December of 2015 – the first in almost a decade. The consensus view suggested that four quarter point rises were on the cards over the course of 2016, but, as we all know, that didn’t happen. The Fed is keen to “re-arm” itself for a potential fight against inflation or recession by having room to manoeuvre with respect to its interest rate policy which means that it wants to see rates float higher toward the long-term average of 5.8% (1971-2016) from its current value of 0.5% (by comparison, the long-term inflation rate in the USA is 3.29% (1914 – 2016). Revised US output figures should make a 2016 interest rate hike a racing certainty.
The first revision of the USA’s Q3 GDP figure, based on a more comprehensive data set, has come in and adjusted the figure upwards to an annualised rate of 3.2% from an initial reading of 2.9%, thereby strengthening the case for a rate hike by the Fed in December. The upwards correction has been attributed to stronger consumer spending in Q3 than initially thought. Q3 GDP shows a significant pick-up over the Q2 which came in at 1.4%.
Commenting on the latest revision, the Commerce Department noted: “The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures, exports, private inventory investment, and federal government spending, that were partly offset by negative contributions from residential fixed investment and state and local government spending.” It revised the consumer spending increased by 2.8% rather than the lower initial estimate of 2.1%. The only cloud on the horizon was that business spending on equipment had been overestimated at 4.8% rather than the more modest 2.7% that the more comprehensive data suggests.