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Fed watching Q2 GDP growth amid disparate forecasts

Fed watching Q2 GDP growth amid disparate forecasts – The Federal Reserve (Fed) made it blatantly clear in May that they were mulling plans for a summer rate hike and that the final decision would be data dependent, but forecasts for second quarter growth show some disparity, even among the individual Fed banks.

The minutes from the April 26-27 monetary policy meeting initially caused markets to scramble to adjust expectations by stating that most participants agreed a rate hike would be appropriate if “incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen, and inflation making progress toward the committee’s 2% objective”.

On Friday, Fed chair Janet Yellen commented that “the economy is continuing to improve” and “growth looks to be picking up”, further suggesting that if the improvement remained on track, it would be appropriate to increase interest rates “in the coming months”.

After a recent flow of generally positive data, growth forecasts for the world’s largest economy had been ratcheted upwards, but there were still differences of opinion as to just how strong growth will be in the second quarter.
There were even disagreements within the Fed itself, as the Atlanta Fed upped its forecast in its most recent update on May 26 to 2.9% from the prior 2.5% based on the latest reports on durable goods and international trade in goods.

However, the New York Fed was not as convinced, upping its own estimate last Friday to only 2.2%, from the prior 1.7%. The increase was based on positive news from new single family houses sold and manufacturers’ new orders of durable goods.

Incidentally, the 2.2% growth forecast for the second quarter is in line with consensus expectations for the data that will not be released until July 29, after both the June 15 and July 27 monetary policy decisions.
However, more dire projections came just last week when Markit’s flash services purchasing managers’ index (PMI) showed activity at its weakest in three months.

Markit chief economist Chris Williamson warned that the data had dashed hopes for a second quarter recovery.
“Service sector growth has slowed in May to one of the weakest rates seen since 2009, and manufacturing is already in its steepest downturn since the recession,” he explained.

Barring any sudden change in June, Williamson said the data was pointing to second quarter growth of just 0.7%.
It remains to be seen whether the revision of the ISM manufacturing PMI out on Wednesday will reflect the same gloomy picture. The initial reading showed activity in May just above stagnation at 50.5.

Regardless, a slew of key economic data will be released in the run-up to June 15 decision, not the least of which will be the Fed\’s favorite inflation gauge, on Tuesday or Friday’s employment report.

Apart from sifting through the data, markets will be wary of Yellen’s own interpretation in a speech at the World Affairs Council set for June 6, just prior to the blackout period. It could be the final hint on when the Fed might continue its tightening cycle.

In the meantime, Fed fund futures discounted only a 28% chance of a move at the June meeting, while odds for a July hike were at 61%.

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