Strong US GDP figures set the stage for a Fed interest rate hike

Lauren Fedor
Follow Lauren
Janet Yellen has said that the US economy and jobs market are continuing to improve
New figures out yesterday showed that US economic growth accelerated in the second quarter, fuelling expectations that the Federal Reserve will hike interest rates later this year.

GDP expanded at a 2.3 per cent annual rate, with strong consumer spending offsetting weak business spending.

Economists had expected a 2.6 per cent rise in GDP, but Millan Mulraine, deputy chief economist at TD Securities, called the figures “a very constructive report.”

“Given the supportive domestic economic backdrop, we expect this positive momentum in activity to be sustained in the coming months, providing the Fed with the necessary justification to raise rates this year, perhaps as early as September,” Mulraine said.

On Wednesday, the US central bank left its key interest rate unchanged at near zero, where it has been since the 2008 financial crisis. But speaking to reporters, Fed chair Janet Yellen once again said that the US economy and job market were continuing to improve, signalling that rates could rise later this year.

The US unemployment rate currently stands at 5.3 per cent, near what many officials consider full employment.

Earlier this month, Yellen testified before members of the US Congress, saying: “Our economy is in a much better state. Low interest rates have facilitated it, and a decision on our part to raise rates will say, ‘No, the economy doesn’t stink.”

“We’re close to where we want to be, and we now think the economy can not only tolerate but needs a higher rate,” she added.

Lisa Hornby, a fixed income portfolio manager at Schroders, said that the latest economic growth figures  “support the Fed’s more upbeat tone on economic conditions.”

“The ECI and payroll data will both be released within the next seven business days and should provide the market with a good indication as to whether or not the Fed will indeed hike in September,” she added.

The dollar index rose 0.6 per cent yesterday off the back of the GDP figures.

Related articles