Running hot

The U.S. economy is running hot, according to the latest revision of GDP, published yesterday. The growth has been revised form an initial 3% to yesterday’s 3.8% YoY growth. In the chart below you can see the breakdown of the components on each revision. Imports continue to be an issue for goeth, but tariffs appear to tone them down, while consumer spending picked up a little bit. Not clear if this move is sustainable, but here we are. In addition to that, the economy also runs hot when it comes to prices, with Core PCE at 2.6%, which is above the Fed’s target and should be a cause to stop cutting rates if the target is 2%. That’s why yesterday as well, Lorie Logan, president of the Dallas Fed, delivered a speech where she advocates for a change in how the FOMC manages monetary policy. Instead of targeting Fed funds rate exclusively, she advocates for the inclusion of other rates, such as the Tri-party General Collateral Rate (TGCR). What that slow g seems to indicate is that the Fed cannot longer use the current view to manage monetary policy and satisfy the demands of the White House, and have taken the smart approach to avoid conflict and change the target, or rather, dilute it, among other rates. We’ll see if it works.

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