The latest GDP figures for the USA economy may help the Fed set a course for its monetary policy in 2018

Nov 28 • Mind The Gap • 310 Views • No Comments

At 13:30pm GMT on Wednesday 29th, the latest quarterly figure for annualized GDP in the USA, will be published. The last quarterly figure produced a growth figure of 3%, the consensus opinion, gathered from the economists polled by Reuters, suggests a rise to 3.2% for the latest QoQ annual growth.

With investors in the USA focused on Trump’s tax proposals, which could be voted on this Thursday in The Senate and the FOMC due to meet in December 12-13th, to discuss interest rates and monetary policy, this latest GDP growth figure could concentrate the minds of the regional Fed chairs who form the FOMC, as they’re deciding the interest rate policy for 2018.

The overwhelming opinion is that the FOMC will announce a rise in the key interest rate in the USA to 1.5%, at the culmination of their December meeting. However, it’s the forward guidance narrative accompanying any announcement, regarding any potential timetable for rate rises in 2018, which investors and FX traders will focus on.

Should the GDP figure come in as forecast at 3.2% growth, then the FOMC may feel empowered to commit to a program of rate rises in 2018, to potentially raise the key interest rate to circa 3% in 2018. If the FOMC do raise the rate in December, then they’ll have kept to their 2017 commitment to raise three times in 2017. Whilst the FOMC’s remit is monetary policy not fiscal, they will be aware of the support Trump’s proposed tax cuts will have on equity markets, therefore through their monetary policy they can afford to be hawkish and tighten monetary stimulus, if growth is strong and the tax cuts are fully enacted.

Should the latest GDP figure come in as forecast, or beat forecast, then USD currency pairs may experience a rise as: investors, traders and analysts will be encouraged at the continual recovery the USA economy has made and deduce that the economy is strong enough to weather a sustained program of rise rises in 2018. Investors may also conclude that the Fed has the room to begin to divest itself of its substantial $4.5 trillion balance sheet, acquired through its asset purchase program (Q.E.) since 2007, as the subprime financial crisis created contagion throughout financial markets.

Naturally should the forecast miss the prediction of a rise to 3.2%, then market participants may consider that the FOMC will have to adopt a far more dovish policy in 2018, as the continued economic growth in the USA is not built on the solid foundations the recent hard data has suggested.

KEY RELEVANT USA ECONOMIC DATA

• GDP growth rate 3%.
• Unemployment rate 4.1%.
• Inflation rate 2%.
• Interest rate 1.25%.
• Government debt to GDP 106%.
• Composite PMI 54.6.
• Retail sales growth 4.6% YoY.
• Wage growth 3.2%.

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