Amid globally turbulent and uncertain times, the latest GDP News Release from the BEA shows a much stronger U.S. economy than had previously been imagined. This news is reinvigorating investor and business confidence, which had recently been shaken by downward corrections in China's economy.
The initial GDP growth estimate for Q2 was 2.3% and has now been calculated to be 3.7% Business investment in the U.S. was stronger than expected and this has contributed to the upward revision.
While the Fed had previously suggested an upcoming interest rate hike to match a strengthening economy, recent increases in global uncertainly have complicated such decision-making. VIX, an index that serves as a measure of volatility, had recently jumped from 15 to over 53 as option prices became too volatile to even quote. Despite high trading volume, liquidity seemed to hit a breaking point when the high-frequency trading algorithms got out of their normal ranges and simply didn't know what to do.
So, despite the positive news of America's Q2 GDP growth, it is uncertain if the underlying factors will continue. Add increasing uncertainty from other major global economies such as China, and the Fed may be compelled to keep interest rates near zero. As always, it seems we're in uncharted territory.
As Yogi Berra said, “It's tough to make predictions, especially about the future.”
“The key to the monetary policy stance in the near term will not be past growth or inflation performance, but the outlook for both,” said Millan Mulraine, deputy chief economist at TD Securities.
“And given the recent financial market volatility and the lingering anxiety about global growth, the outlook for both is now more uncertain and tilted to the downside, especially for inflation. This will provide the pretext for the Fed to take a pass on raising rates in September,” he added.
Read the full GDP Report from the Bureau of Economic Analysis