Slowing growth and stubborn inflation in the U.S. economy may not be a nightmare for the Federal Reserve, but it could at least be a source of uneasy sleep. First-quarter results released on Thursday showed that the U.S. economy grew at an annualized rate of 1.6%, the lowest level in the past two years, and the inflation rate almost doubled from the previous quarter, reaching the highest level in a year. Together, these two data points point to at least a mild stagflation environment that will make policymaking difficult in the coming weeks and months. Matthew Ryan, head of market strategy at global financial services firm Ebury, said of the U.S. Commerce Department’s GDP report: “It was obviously unexpected. I think it was maybe overdue.” “We saw that the U.S. economy not only exceeded Having exceeded expectations and, I would say, also defied conventional logic and grown at a very solid pace in recent months, you would have thought that the market might not be able to reach this depth and for this long after the Fed started raising rates. Been expecting a continuation of the string of good numbers since mid-2022, with real GDP growth at 2.4% and inflation numbers around 3%. What it got was essentially what some on Wall Street were calling the worst of both worlds: growth. Weakness and stubborn price pressure. As a result, stocks sold off sharply, Treasury yields rebounded higher, and futures traders once again had to reprice expectations for Fed rates, according to CME Group’s widely followed FedWatch tracker. After expecting at least six rate cuts at the beginning of the year, the market is now down to one and is no longer considering another implicit rate cut, Ryan said, although he believes the Fed may consider the economic slowdown conducive to the possibility of easing policy. There is some logic, but officials will likely look more closely at personal consumption expenditures price index data, their preferred inflation gauge. In the first quarter, overall personal consumption expenditures (all items measured) grew at an annualized rate of 3.4%, which was not the case. Core PCE growth, which includes food and energy costs, was 3.7%. The Fed will get a closer look at the PCE data when the Commerce Department releases March monthly data on Friday. “I don’t think the Fed will be disappointed because it was slightly weaker than expected. GDP data has been greatly affected, even an annualized figure of 1.6% is not an absolute disaster, which is still a pretty solid growth number,” Ryan said. “The Fed is going to be more concerned about inflation.” In fact, some Wall Street commentators noted that the GDP numbers were not concerning. Steven Blitz, chief U.S. economist at TS Lombard, wrote that much of the weakness came from inventories and federal spending, while “growth in these sectors is accelerating, reflecting improving confidence in the economy’s future.” “. “Mathematically, the private sector is not weak.” Blitz did note the issue of a stronger dollar shifting capital equipment purchases to foreign producers, and the data reflecting a decline in gross domestic production due to higher net imports. “In the face of all this, what is the Fed going to do? It’s going to be on hold now because the likelihood of a rate cut this year continues to fade,” he said. “But, ultimately, this is a real growth story and a good thing.” Citigroup, one of the few firms on Wall Street that still expects the Fed to take a dovish stance this year, stood by its view on Thursday, saying the Fed Fed officials may be inclined to cut interest rates to stem a slowdown in economic growth and would be encouraged to do so if inflation indicators weaken. “Concerns about weak growth will be a key factor in the Fed’s consideration of rate cuts, with first-quarter GDP details suggesting fading support from weak fiscal stimulus and goods spending,” Citi economist Veronica Clark wrote. “The Fed will cut interest rates this summer before inflation continues to slow.”
