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GDP Adds Fuel to the Fed’s Fire

marketThe Bureau of Economic Analysis reported an upward revision to the first quarter estimate of the gross domestic product, which some industry experts believe will not only signal better growth in the second quarter, but also motivate the Fed to raise rates.

The GDP bounced back slightly in the second estimate for Q1, released on Friday, May 27. The Bureau of Economic Analysis reported GDP growth at annual rate of 0.8 percent for the second estimate, still down from Q4’s GDP growth rate of 1.4 percent.

“Real GDP has been on a downward trend since the second quarter of 2015 (growth: 3.9 percent), a result of slower or negative growth in personal consumption spending, private investment, and exports,” said Carmel Ford of the National Association of Home Builders (NAHB). “It is important to note that although overall private investment has dropped, residential fixed investment growth has accelerated. The residential fixed investment component of GDP grew at a seasonally adjusted annual rate of 17.1 percent in the first quarter, up from 10.1 percent in the fourth quarter of 2015. This GDP component includes the construction of new single-family and multifamily units, remodeling, and other activities related to housing.”

Curt Long, Chief Economist from the National Association of Federal Credit Unions (NAFCU), stated, “While first-quarter GDP remained low despite the upward revision, there are a number of reasons to anticipate a rebound in the second quarter. Incoming data has been noticeably stronger, the drags from low oil prices and a strong dollar were less than previously estimated, and there is still a possibility that the government’s seasonal adjustment continues to underestimate GDP in the first quarter while boosting it in subsequent quarters. Overall, this is another in a string of positive data releases which will provide plenty of ammunition for the Fed to raise rates no later than July.”

It may be sooner; Fed officials have dropped strong hints that a June rate hike is forthcoming. Fed governor Jerome Powell, a voting member of FOMC, said in a public address on Thursday that he believes the economy is on “solid footing" and that the economy could be ready for the Fed to raise the federal funds target rate “fairly soon.” After June, the next FOMC meeting will be July 26-27.

The FOMC refrained from raising the federal fund rate at the April meeting, even with further improvement observed in the housing sector. However, speculation persists about another rate hike by the Fed in June, which would be the first time the Fed has raised the federal funds target rate since the historic liftoff in December.

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