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Weekly Economic Update: August 2, 2023

Presented by Nicholas Wealth Management

Another Fed meeting, another rate hike As anticipated, the Federal Reserve increased interest rates by another 25 basis points during last week’s meeting, taking the Fed Funds rate to 5.25-5.50% (the highest level since 2001). In his post-meeting remarks, Fed Chair Jerome Powell left the door open for additional hikes in 2023 and indicated that rate cuts aren’t on the table for this year — at least, not yet. Powell acknowledged that “restrictive” monetary policy was now “putting downward pressure on economic growth and inflation” but said the Fed would be watching the data to make future decisions. Data released late last week seemed to back up Powell’s statements. The first reading of second-quarter gross domestic product (GDP) was released just after the Fed’s meeting. The U.S. economy grew by 2.4% in the second quarter, up from 2.0% in the first quarter and above expectations of 1.8%. Meanwhile, durable goods orders jumped 4.7% in June. The data reveals we are nowhere near a recession, and the economy is accelerating instead of decelerating as expected. Even Powell noted in his remarks that the Fed’s staff is no longer forecasting a recession. As a result, the Fed sees room to raise rates to keep fighting inflation. Markets didn’t like this idea, and volatility rose mid-week in response. However, markets calmed following positive inflation news on Friday. Personal consumption expenditures (PCE) — the Fed’s preferred measure of inflation — showed a year-over-year increase of 4.1% for June, the slowest increase since September 2021. And the employment cost index, which indicates wage inflation, rose 1% in the second quarter for its smallest increase in two years. All of the numbers indicate inflation is dropping, and now we have nearly two full months for rates to keep battling inflation before the Fed meets again. The data, plus Powell’s comments, are raising anticipation that the Fed is done raising rates for now, and the optimism continues to fuel the summer rally as we head into August.
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