GDP CPI Point to Fed Interest Rate Hikes
Endless big events in our fast-paced world continue to have major effects on the financial environment. Our job is to decide which are important – and when and how to respond.
The advanced report on first-quarter gross domestic product (GDP), for instance, showed a decline of -1.4%. The advance report may demonstrate how the economy weathered the omicron variant still gripping the country early in the first quarter; it may also give some early insight into the economic effects of the Ukraine invasion, which started in late February.?
The first-quarter consumer price index (CPI) also showed a 40-year high spike of 8.5%.
COVID and the war may seem to have become old headlines in our fast news cycle, but they are not old as far as GDP is concerned. The quarterly report is the most comprehensive study of the economy, so economists spend a great deal of time reviewing the data. Indeed, perhaps no two economic reports this year will be more scrutinized by investors, economists and pundits as they provide economic clues that could signal both pending Federal Reserve Board actions and a coming recession.
It is important to remember that GDP is a lag indicator, measuring the overall economic output that's already occurred. While the CPI is also a lagging indicator, it is heavily relied on by the Fed as one of the best indicators of inflation.
The clear rise in inflation has spurred the Federal Reserve to change its monetary policy: We saw another 50-basis points increase in short-term interest rates on Wednesday May 4 – the first increase since 2018.
Perhaps more importantly, the Fed is decreasing its balance sheet of fixed income securities it purchased over the past several years. According to Chair Powell, it will reduce the balance sheet by $47.5 billion a month starting June 1 and increase that reduction to $95 billion starting September?1.
This means your adjustable-rate loans – mortgages, credit cards, home equity or commercial or personal lines of credit – go up 0.50% next statement cycle. On the plus side, your savings accounts, certificates of deposit and money markets accounts will also go up (just not likely by 0.50%). Unfortunately, bonds and bond mutual funds that you own will fall as they have been doing all year.
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Be assured that our professionals look at both lead and lag indicators to help gauge the economy's direction. We’ll be here for you?and your financial growth no matter which signals are sent or direction the economy takes.
Written by Walid L. Petiri
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