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
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.