June 21, 2024

A strong GDP report helps Biden. It may complicate things for the Fed.

President Biden and other Democrats were largely exultant Thursday after an economic reading showed the US economy grew at a faster-than-expected rate to cap off 2023.

The advance estimate of fourth quarter US gross domestic product (GDP) showed the economy grew at an annualized pace of 3.3% during the period. It blew out consensus forecasts that the number from the Bureau of Economic Analysis would come in at 2%.

“That is three years in a row of growing the economy from the middle out and the bottom up on my watch,” Biden said in a statement Thursday morning.

President Joe Biden stands with Col. Paul Pawluk, Vice Commander for the 89th Airlift Wing, before he boards Air Force One upon departure, Thursday, Jan. 25, 2024, at Andrews Air Force Base, Md. Biden is headed to Wisconsin. (AP Photo/Alex Brandon)

President Joe Biden offered reporters a thumbs up as he left Washington Thursday morning for a speech in Wisconsin. (AP Photo/Alex Brandon) (ASSOCIATED PRESS)

While the news was a clear political win for the White House, it does make things more complicated for central bank officials located a few blocks away at the Federal Reserve as they consider whether to cut benchmark interest rates in 2024.

Fed officials have predicted three cuts this year, but policymakers have been pushing back on market expectations for a loosening as early as March, cautioning that they need more data to be sure about such a pivot.

The hotter-than-expected growth could support an argument for pushing any cuts beyond March.

“The economy fared noticeably better than expected in the final three months of last year, reinforcing our view that market expectations for the Federal Reserve to cut interest rates as early as March is premature,” Oxford Economics chief US economist Ryan Sweet wrote in a note to clients on Thursday.

But the report also included good news on inflation, showing that the Fed’s preferred measure of price increases jumped on a quarter to quarter basis at a 2% annualized rate. It was the second quarter in a row at that pace and in line with the central bank’s target of 2%.

That news could give the Fed more flexibility to consider an earlier cut.

“The Fed will have to ease unless they have very good reasons to think the economy is about to re-strengthen or inflation somehow will rebound,” Pantheon Macroeconomics Ian Shepherdson wrote in a note to clients. “We doubt those arguments can be made with confidence, so we expect the first easing in March or May.”

U.S. Federal Reserve Chair Jerome Powell attends a press conference in Washington, D.C., the United States, on Dec. 13, 2023. The U.S. Federal Reserve on Wednesday left interest rates unchanged at a 22-year high of 5.25 percent to 5.5 percent as inflation continued to cool, signaling an end to its rate hiking cycle and possible rate cuts next year. (Photo by Liu Jie/Xinhua via Getty Images)

Federal Reserve Chair Jerome Powell in Washington on Dec. 13, 2023. (Liu Jie/Xinhua via Getty Images) (Xinhua News Agency via Getty Images)

David Doyle, the Macquarie Group Head of Economics, was less optimistic on immediate cuts in a Yahoo Finance Live appearance Thursday morning.

“I don’t think that will be enough to move the needle for them towards a March cut,” he said. “I think they need to see more evidence that core inflation is heading back towards the 2% target on a year-over-year basis.”

Investors will also get another reading on core inflation Friday when the numbers for the month of December are released. Economists had been expecting that monthly reading to show a 3% gain.

Overall good economic news

The overall news for the economy from Thursday’s report appeared to be strong, another positive note to cap a 2023 that economic prognosticators had expected to end in recession.

For all of 2023, the US economy has grew at an annualized rate of 2.5%, an increase from 1.9% in 2022.

“But despite the robust growth, inflation was tame,” wrote Mark Zandi, chief economist at Moody’s Analytics, on X. “Feels very good.”

It was also another strong indicator for the White House as the President turns toward a 2024 that appears set to bring a head-to-head re-election showdown with Donald Trump. Allies of Biden from his 2024 campaign to his cabinet took to social media to tout the news.

The overall numbers were “good news for American families and American workers,” Biden said in hius statement with Treasury Secretary Janet Yellen, adding “our economy continues to grow.”

The tone was echoed by Democrats on Capitol Hill. Sen. Martin Heinrich (D-NM), Chairman of the U.S. Congress Joint Economic Committee noted that “all signs continue to point to a stable and growing economy” as Democrats face the coming election season.

Ben Werschkul is Washington correspondent for Yahoo Finance.

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