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Fed Expects Moderate Growth In GDP Over The Next Few Years

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Federal Reserve chair Janet Yellen delivered a speech at the Jackson Hole Economic Symposium Friday morning. Here’s what she said, the key point: “In light of the continued solid performance of the labor market and our outlook for economic activity and inflation, I believe the case for an increase in the federal funds rate has strengthened in recent months.”

Yellen said the Fed expects “moderate growth” in gross domestic product, additional strengthening in the labor market and inflation rising to 2% over the next few years. She said that any decision on interest rates “always depends on the degree to which incoming data continues to confirm the Fed policy committee’s outlook.” Yellen spent the bulk of her speech discussing the potential need to add new tools to the Fed’s toolkit to combat the next recession given that interest rates remain so low. Yellen said the “U.S. economy was nearing the Federal Reserve’s statutory goals of maximum employment and price stability.”

In the past, Yellen has been dovish; in no hurry to raise rates; and she wasn’t exactly pounding the table, and she didn’t give a specific date when the Fed might make a move. And even though Yellen was making a case for action, the markets kind of shrugged it off initially. So, vice-chair Stanley Fischer came along later and removed any ambiguity, saying: “Yellen’s comments are consistent with a possible September hike.”

That is not a guarantee of a rate hike but if the Fed takes action in about 3 weeks, you can’t say you weren’t warned. Stocks, bonds and commodities were all sporting nice gains following Yellen’s speech, then Fischer provided clarification and selling ensued, while at the same time the dollar moved higher and the VIX spike 4.5%.

U.S. economic growth was a bit more sluggish than initially thought in the second quarter as businesses aggressively ran down stocks of unsold goods, offsetting a spurt in consumer spending. Gross domestic product expanded at a 1.1 percent annual rate, down from the 1.2 percent rate reported last month. The revision also reflected more imports than previously estimated as well as weak spending by state and local governments. The economy grew at a 0.8 percent pace in the first quarter. It grew 1.0 percent in the first half of 2016.

The government also reported that after-tax corporate profits fell at a 2.4 percent rate last quarter after increasing at an 8.1 percent pace in the first quarter. Weak profits could limit an anticipated rebound in business spending. With profits declining, an alternative measure of growth, gross domestic income, or GDI, increased at only a 0.2 percent rate in the second quarter, the weakest since the first quarter of 2013.

Masked in the latest quarter is a very strong 4.4 percent annualized growth rate for consumer spending which is 0.2 percent higher than the first estimate. Inventory draw...