The Federal Reserve could double its economic growth forecast for 2023

The American economy has proven so solid lately that officials of the Federal Reserve they will probably have to double its growth projections by 2023 when they release their updated outlook later this month.

After a series of better-than-expected reports in everything from consumer spending to residential investment, economists have raised their forecasts for gross domestic product. A widely followed unofficial estimate by the Federal Reserve Bank of Atlanta even predicts an annualized growth of 5.6% in the third quarter.

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This represents a radical departure from three months ago – the last time the monetary authorities updated their own figures – when the consensus was that the economy would stagnate in the current quarter. And it may be enough for Fed officials to revise their estimates for interest rate cuts in 2024.

“Consumer spending was strong in June and July, so the third quarter is practically priced in,” said Stephen Stanley, chief economist at Santander Capital Markets US, which projects 3.7% growth in the period from July to September. “5% seems too high, but not impossible”.

Any GDP growth data above 3.2% would mark the strongest quarter since 2021, when the United States was experiencing a rapid recovery after the initial shock of the pandemic. Acceleration contrasts with prospects for Chinawhich have been lowered in recent weeks amid a growing real estate crisis.

Federal Reserve: US economic growth doubling?

In the latest update of the US economic outlook from Fed officials, issued in mid-June, the median was for GDP growth of just 1% in 2023. At the time, this marked an improvement over the previous round of projections in March, which anticipated a recession this year.

According to Omair Sharifpresident of Inflation Insights LLC, that figure is likely to rise to 1.8% or 2% in new projections to be published at the end of the central bank’s monetary policy meeting on September 19 and 20, and the outlook for the unemployment rate could be revised downwards.

Improved growth could also lead policymakers Federal Reserve to reduce the easing planned for next year to 75 basis points of rate cuts instead of 100, according to Sharif.

General rebound

The indicator of the Federal Reserve The Atlanta rate, which is independent of the monetary authorities’ quarterly projections, is volatile and will likely be revised down before the government releases its first official estimate of growth for the current quarter in late October. But it underlines the widespread improvement in confidence in recent months.

Despite growing optimism, the central bank has signaled that it is likely to leave its benchmark interest rate unchanged at its September meeting.

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In July, the Fed raised rates to a range of between 5.25% and 5.5%the highest in 22 years, and Federal Reserve Governor Christopher Waller said Tuesday that policymakers can now afford to “proceed cautiously,” given recent data showing inflation continues to decline.

“The economy picked up over the summer, but the Federal Reserve is willing to wait until September,” said Diane Swonk, chief economist at KPMG LLP in Chicago. “A soft landing is now the most likely scenario”.

Although the chances of a recession have diminished, analysts remain firm in their predictions that growth will slow in the fourth quarter. Rising gasoline prices, the resumption of student loan payments and the possibility of a government shutdown are some of the factors against it.

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What Bloomberg Economics Says…

“We do not consider that the likely strength of GDP in the third quarter is indicative of a greater probability of a soft landing, quite the contrary: in our opinion, increases the probability that GDP will be negative in the fourth quarter. With no comparable forces on the horizon in Q4, with student loan payments resuming, consumer loan delinquencies rising, and the labor market weakening, consumer spending is likely to be weak in Q4.”

— Anna Wong, Chief US Economist

Many also believe that the impact of the aggressive rate increases implemented over the past year and a half and the tightening of credit conditions following the bank failures earlier this year will soon begin to be felt.

“The end of the three-year student forbearance program is likely to put some pressure on consumer spending, as more than 27 million borrowers will have to start making monthly loan payments,” said Thomas Feltmate, senior economist. from TD Bank Group.

Translated by Paulina Munita.

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