Strong GDP Growth in Q3 Could Become a Threat to Monetary Policy

Chief Economist Eugenio J. Alemán discusses current economic conditions.

The Federal Reserve (Fed) has been trying to slow down the U.S. economy for more than a year in order to slow down inflation. The process has, so far, been very successful, as shown by the graph below. However, economic growth has been volatile, and now it is reaccelerating once again. The latest surge in growth, to an annualized quarter over quarter rate of 4.9%, is another reminder to markets that what Fed officials have been arguing during the last year –“higher for longer”– is real. The fight to get inflation back into submission and to their long term 2.0% target is still a work in progress.

We understand what many analysts/economists are saying about inflation, and we agree with most of this. It is clear that inflation has continued its disinflationary process, and this is likely to extend in the short to medium term. However, the Fed has to be forward looking and the fact that federal funds rates of 5.25%- 5.50% are still not able to keep economic growth from accelerating will keep them from abandoning their hawkish stance.

The biggest threat the Fed is facing is that economic growth is moving up again, and this has the potential of reigniting inflationary pressures going forward. Of course, the Fed is aware that monetary policy works with “long and variable lags,” but doesn’t want to face another “failure to launch” moment and have to regret it again.

GDP GROWTH