Indicators Of Strong GDP Growth Fuel Rate Hike Fears

Equity markets in the US sold off heavily on Friday as recently released indicators of third quarter GDP continued to climb. The forecasts currently range from 2.8% to 3.5% and this stronger GDP growth is fueling speculation that the Federal Reserve will start raising interest rates sooner rather than later. Rising interest rates make stocks a less attractive investment. Of course, one strong quarter of strong GDP growth will hardly offset the anemic growth we saw in the first half of the year. And 3% is hardly the sign of an overheating economy, especially after the last eight years of a struggling economy. But the hawks in the Fed seem determined to raise rates although it is hard to see what their motivations might be. Some are living permanently in the 1970s and see runaway inflation around every corner. Others, perhaps, might want to move rates slowly back to normal simply to have the ability to cut rates when the next slowdown hits. But until we see a few quarters of strong GDP growth in a row and inflation starts moving above the Fed target of 2%, it is hard to make a real case for a rate hike. The next Fed meeting is a few days away and I think they will hold rates steady with a number if dissensions. There is a political calculus in play this month even if the Fed does not want to admit it. If they raise rates and the economy tanks before the election, they will be held responsible. If they do hold rates steady this month and growth and employment continue to be strong, then you can be sure rates will go up when they next meet in December.