GDP Report Gives the Fed an Opt-Out From its Rate Cut

The 3.9% growth rate in thrid-quarter GDP is only preliminary, but it is very large, and it does give me a little less certain that the Fed is going to cut rates this afternoon. While housing is indeed dreadful, with residential fixed investment plunging by 20.1%, no one seems to have told the insatiable US consumer: retail spending was up by 3.0%.

The weak dollar is finally showing up in increased export figures, which is good for the economy at the margin, but exports will never grow enough to avoid a recession. More encouragingly, however, business investment seems to be extremely healthy, with business spending increasing by 7.9% and investment in structures up 12.3%. Crucially, inflation is low but rising, at least as measured by the Fed.

If all you were looking at was the Q3 GDP report, then, you wouldn't even think about cutting rates. And this number is certainly vastly better than anybody dared hope three months ago, when the preliminary Q2 number also looked pretty healthy. If the Fed wants an excuse not to cut rates, it now has one.

All the same, a decision to keep rates on hold would cause all manner of unpleasant gyrations in the market, at precisely the point at which the markets were just beginning to get back to some semblance of normality. The Fed has no mandate to minimize market volatility, of course. But a 25bp rate cut now, accompanied by a statement saying that inflationary pressures are likely to preclude another one, might still be the most prudent course of action.