Strong GDP Growth Gives the Fed a Fresh Inflation Problem
Strong GDP Growth Gives the Fed a Fresh Inflation Problem
The Federal Reserve held its benchmark rate at 3.75% to 4% on Wednesday, arguing it could pause and assess incoming evidence before deciding its next move. Chair Kevin Warsh called the period ahead “information rich,” saying policymakers were keen to take notice of the changes unfolding in the economy and abroad.
Thursday’s Commerce Department reports promptly delivered a difficult mix. Gross domestic product grew at a 3.4% annualized rate in the third quarter, beating the 3.1% forecast and accelerating from 2.2% in the prior quarter. A separate account of the release likewise described the result as the economy beating forecasts at a 3.4% pace.
The expansion was broad enough to undercut recession fears. Consumer spending rose 3.8%, while gross private domestic investment surged 19.4%, driven by stronger equipment and intellectual-property spending. Chris Rupkey, chief economist at Fwdbonds, said growth was “powering ahead” despite geopolitical uncertainty and higher energy costs.
But the same day brought the complication the Fed cannot ignore. The personal consumption expenditures price index rose 0.5% in September, the biggest monthly gain since March, leaving the annual rate at 3.6%—well above the central bank’s 2% goal. Core PCE, which strips out food and energy and is closely watched by policymakers, increased 0.3% for the month and 3.1% from a year earlier.
Energy drove much of September’s pressure: gasoline and other energy goods rose 9.2% during the month. Yet services prices excluding energy and housing also climbed 0.4%, raising the risk that the inflation burst spreads more widely. Low jobless claims—194,000 for the latest week—added another sign that the economy remains resilient, not cooling abruptly.
The result is a sharper policy dilemma: an economy strong enough to withstand restraint, but inflation persistent enough to make a prolonged Fed pause harder to defend.
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