However, what’s clear is that the US economy is doing pretty good in the context of slower overall growth potential. In fact, this new normal is actually a whole lot better than a cursory analysis would have you believe, and is far from an “emergency” situation warranting emergency-level monetary stimulus.
Market Realist – What’s the new “normal” for the US GDP growth?
Potential output growth and total factor productivity growth will likely rise in the next few years in the advanced economies (EFA)(VEA), according to the IMF (International Monetary Fund). In other words, we’ll likely see higher GDP (gross domestic product) growth rates in these economies.
Back in the US, we would see a better GDP growth rate in 2Q15—compared to what we saw in 1Q15. However, the rebound is expected to be moderate. Wall Street estimates are close to 2%.
The federal funds rate is still stuck at “emergency levels” of ~0%. If inflation rises quicker than the Fed’s estimates, the Fed would be forced to raise rates quickly. The impact would be similar to going from first gear straight to fourth gear! This could have a negative impact on the stock (VTI) and bond (AGG)(BND) markets.
The Fed will probably hike rates in September. In fact, the markets seem to have factored this in already. The March FOMC (Federal Open Market Committee) statement forecast for the midpoint rate at the end of 2015 was about 90 bps (basis points). At the June meeting, the weighted average forecast was much lower at ~70 bps.
Read What Do Higher Rates Mean for Consumers? to learn why consumption figures could be improving more.