Surprise upward revision of US GDP gives further support for interest rate rise

 
Jasper Jolly
Janet Yellen Holds Press Conference On Interest Rates
The Federal Reserve has said that strong data will bolster its case for a rate rise (Source: Getty)

US growth surprised analysts by being revised upwards in the third quarter, strengthening the case for the Federal Reserve to raise interest rates at its next meeting in December.

Gross domestic product (GDP) increased at an annualised rate of 3.2 per cent from July to September, a big jump from second-quarter growth of 1.4 per cent, according to data from the US Bureau of Economic Analysis.

Personal spending by US consumers was higher than had been previously forecast, pushing growth beyond the early estimate of 2.9 per cent. Quarterly GDP growth is now at its highest rate since the third quarter of 2014. Current-dollar GDP now measures $18.7tn.

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The Federal Reserve has previously said in minutes of its Open Market Committee (FOMC) it would raise rates “relatively soon so long as incoming data provided some further evidence of continued progress toward the committee’s objectives”.

While there is no explicit GDP growth target, the heightened rate bolsters the case that the US economy is in good health as the Barack Obama administration comes to an end.

Federal fund futures markets imply a rate rise in December is a near certainty, and the latest FOMC minutes showed that some members think rates must rise to “preserve credibility”.

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However, there has been little indication so far as to the exact timing of further rate rises. The promise of President-elect Donald Trump to deliver a massive fiscal stimulus in the form of unfunded infrastructure spending could potentially allow the Federal Reserve to raise rates at a faster rate than previously expected.

Ian Kernohan, economist at Royal London Asset Management, said: “Robust US GDP growth in the third quarter, driven by household demand, was a marked improvement on the first half of the year.”

“This should bolster the case for a rise in US interest rates in December. We think the Fed will wait until they see the scale and timing of any Trumpflation fiscal boost, before altering their language about gradual rate hikes,” he added.

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