US President Biden and other Democrats were mostly excited after the latest GDP data showed that the US economy grew faster than expected on Thursday - this excellent US economic report put a good end to their work in 2023.
The report released by the US Department of Commerce on Thursday showed that the initial annualized quarterly growth rate of US real GDP in the fourth quarter recorded a growth rate of 3.3%, and the full year economic growth rate in 2023 was 2.5%. Although the growth rate in the fourth quarter slowed down from 4.9% in the previous quarter, it far exceeded market expectations of 2%.
The final performance of this 2023 US economic report clearly contrasts with the pessimistic expectations of economists a year ago, who believed that the economy was highly likely to experience a recession.
But now, economists generally predict that the US economy may continue to expand in 2024, although the pace will significantly slow down. They said that the expected interest rate cuts from the Federal Reserve should support this year's economy. Some surveys have shown that slowing inflation and a still tight job market have boosted consumer confidence levels.
From the reaction of the White House after the data release, it can be seen that US President Biden immediately boasted about his achievements in a statement on Thursday morning local time. The statement stated, "Under my leadership, the economy has achieved internal and bottom-up growth for three consecutive years."
US Treasury Secretary Yellen also said of the GDP report, "This is a good thing, reflecting strong and healthy spending and productivity improvements, and it is likely not to bring inflation challenges. I did not see any signs of a soft landing threat in this report."
The Democrats on Capitol Hill also made the same "cheers". Democratic Senator and Chairman of the Joint Economic Committee of the United States Congress, Martin Heinrich, pointed out that as Democrats face the upcoming election season, "all signs indicate that the economy continues to remain stable and growing.".
Is the Federal Reserve facing the "annoyance of happiness"?
However, although this news is clearly a political victory for the White House, it may make things more complicated for Federal Reserve officials a few blocks away as they are currently considering when to lower the benchmark interest rate within the year.
Federal Reserve officials predicted in December last year that there would be three interest rate cuts this year, but decision-makers have been avoiding market expectations that the Fed will relax interest rates as early as March. They warn that more data is still needed to determine such a shift.
Higher than expected economic growth data may undoubtedly support the idea of postponing any interest rate cuts beyond March.
"The economic performance in the last three months of last year was significantly better than expected, which reinforces our view that it is premature for the market to assert that the Federal Reserve will cut interest rates as early as March," said Ryan Sweet, Chief US Economist at Oxford Institute of Economics, in a statement to clients on Thursday
However, it is worth pondering that this hot GDP data did not further dampen the market's expectation of interest rate cuts last night. On the contrary, interest rate futures traders' expectations for a 25 basis point rate cut by the Federal Reserve at its March meeting actually returned to about 50% on Thursday.
Behind the expected increase in interest rate cuts, in addition to the fact that the European Central Bank, which is far away, "stood up" at its first interest rate meeting this year, this GDP report also includes good news on inflation - the core PCE price index in the United States recorded an annualized quarterly rate of 2% in the fourth quarter, marking the second consecutive quarter of this indicator maintaining this low growth rate and continuing to meet the Federal Reserve's set 2% inflation target.
This may make it somewhat uncertain when the Federal Reserve will cut interest rates again: early rate cuts may put the US economy at risk of overheating, but some inflation indicators do indicate that the Fed's battle against inflation is nearing victory.
In the financial market, with the expectation of interest rate cuts rising instead of decreasing, the yield of US Treasury bonds of all maturities also fell across the board on Wednesday. Among them, the 2-year US Treasury yield fell 8.8 basis points to 4.304%, the 5-year US Treasury yield fell 9.1 basis points to 4.004%, the 10-year US Treasury yield fell 5.8 basis points to 4.123%, and the 30-year US Treasury yield fell 3.6 basis points to 4.375%.
Pantheon macroeconomist Ian Shepherdson wrote in a statement to clients on Thursday, "Unless the Federal Reserve has very strong reasons to believe that the economy is about to strengthen again or inflation will rebound in some way, they will have to relax monetary policy. We doubt whether these conditions can be met, so we expect the first easing policy to be introduced in March or May."
Of course, Thursday's GDP report has also puzzled some economists, as there are inherent contradictions between strong economic growth and slowing inflation that are difficult to resolve.
"My opinion is that this combination of data is very, very unusual, and unlikely to continue," said Tom Simons, a Jefferies money market economist. "Either inflation rebounds again, or economic growth slows down. I just don't understand how the perfect, ideal, and flawless inflation cooling narrative that the economy is experiencing can continue?"