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20 Jun 2013
Flash: Nominal US GDP a key focus of tapering debate – Deutsche Bank
FXstreet.com (New York) - According to Macro Strategy Analysts J. Reid and C. Tan at Deutsche Bank, “The last two quarters have seen the lowest US nominal GDP since Q1 in 2010 – some 13 quarters ago now and this has recently been a weakening nominal recovery and one that even at its peak was still very weak relative to history.”
Nominal GDP of critical importance
Clearly the Fed has emphasized many times the difference between the end of asset purchases and a policy rate hike but investors may perceive the latest signaling as the beginning of a ‘tightening’ journey. If that’s the case we note that the Fed has never hiked rates in the past when nominal GDP is growing below 3.5% (3.4% in Q1 2013).
Furthermore, for the Fed to be tightening while nominal GDP has been weakening is also a rare occasion. The last time we saw this was in 1979/80 when nominal GDP fell from 14.6% in Q1 1979 to 10.6% in Q1 1980 whilst the Fed Funds rate rose from 10% to 20% during the same time on sharp inflationary concerns. What’s also unusual is that yesterday’s ‘tightening’ came as the Fed lowered their projections for core inflation to 1.2-1.3% from 1.5-1.6% for year-end 2013 although they noted that there are transitory influences, and acknowledged that inflation over the medium term will likely run at or below its 2% objective.
Nominal GDP of critical importance
Clearly the Fed has emphasized many times the difference between the end of asset purchases and a policy rate hike but investors may perceive the latest signaling as the beginning of a ‘tightening’ journey. If that’s the case we note that the Fed has never hiked rates in the past when nominal GDP is growing below 3.5% (3.4% in Q1 2013).
Furthermore, for the Fed to be tightening while nominal GDP has been weakening is also a rare occasion. The last time we saw this was in 1979/80 when nominal GDP fell from 14.6% in Q1 1979 to 10.6% in Q1 1980 whilst the Fed Funds rate rose from 10% to 20% during the same time on sharp inflationary concerns. What’s also unusual is that yesterday’s ‘tightening’ came as the Fed lowered their projections for core inflation to 1.2-1.3% from 1.5-1.6% for year-end 2013 although they noted that there are transitory influences, and acknowledged that inflation over the medium term will likely run at or below its 2% objective.