The United States economy grew by 2.0% in the first quarter of 2023, according to revised figures from the Bureau of Economic Analysis. While the increased estimate would normally elicit a more positive effect from economists, there is a significant chance that it portends higher inflation and interest rates.
On the surface, the revision of Q1 2023 GDP growth from 1.3% to 2.0% indicates a faster-growing economy. However, the revised figure is still below the economic growth rate prior to the start of the pandemic, which reached 2.9% in 2018 during the administration of former President Donald Trump.
However, the higher-than-anticipated growth rate likely signals that significant inflation will continue into the short and medium term. The inflationary pressure will likely be a key catalyst regarding future interest rate increases by the Federal Reserve.
Federal Reserve Chair Jerome Powell indicated earlier this week that the central bank will likely increase interest rates later this year.
“We expect the moderate pace of interest rate decisions to continue,” he said.
The Federal Reserve paused interest rate hikes in June following a series of hikes meant to quell inflation.
The Fed chief said that a “strong majority” of the bank’s officials believe there will be at least two more rate increases by the end of 2023.
The Federal Reserve will hold its next policy meeting later this month.
In June, Powell said that the process of reducing inflation would “take some time.”
“We want to get inflation down to 2%, and we just don’t see that yet,” he said.
The Fed chair’s comments also come as Atlanta Federal Reserve President Raphael Bostic indicated that higher interest rates are likely still needed if inflation creeps higher.
Bostic said that the Fed’s current actions had reduced inflation toward a “normal” range, but that if prices spike the central bank must act quickly.
“If I see signs that it is moving away, I’ll be right in the front of the line to say we need to move rates higher, we need to be aggressive,” he said.