US GDP print supports Federal Reserve's case for more rate hikes

(Alliance News) - The US economy grew faster than previously thought in the third quarter, according to the third and final estimate from the US Bureau of Economic Analysis on Thursday.

For Oanda's Edward Moya, the revised data pointed to a US economy that doesn't want to head into a recession "anytime soon".

Gross domestic product grew by 3.2% in the third quarter on a year before. This was an increase from the previous estimate of 2.9% growth. Market consensus cited by FXStreet had expected the estimate to remain at 2.9%.

The better-than-expected GDP print, for many analysts, supported the US Federal Reserve's case for more ongoing rate increases.

The Fed has raised interest rates seven times this year in an attempt to cool down decades-high inflation, walking a tightrope to try to calm the economy without triggering a recession.

Last week, the central bank lifted interest rates by 50 basis points, as widely expected, but forecast that interest rates would peak at a higher level than previously expected.

IG's Joshua Mahony explained that many investors would have a growing feeling of concern about the Federal Reserve continuing to push rates upwards following the revision due to the "absence of any major economic distress signal" in the US economy.

Oren Klachkin at Oxford Economics said the unexpected revision to third quarter GDP is "encouraging" but added that the economy will "soon be tested by the recent tightening in financial market conditions and Fed rate hikes".

Oanda's Moya agreed: "Global coordinated central bank tightening has yet to fully impact most of the economic readings for the major economies and that should have investors nervous over ​earnings downgrades and credit risks."

The data also showed that personal consumption expenditures picked up 2.3%, markedly higher than the 1.7% previously estimated.

"Despite a rapid increase in interest rates, the economy is growing and importantly, households are still spending," said Rubeela Farooqi of High Frequency Economics.

For Oxford Economics' Nancy Vanden Houten, the key indicator for the future of interest rate in the US was this week's initial jobless claims.

Initial claims for unemployment insurance in the US rose in the most recent week. Seasonally adjusted initial jobless claims were 216,000 in the week that ended the past Saturday, up 2,000 from 214,000 the week before.

The figure for the week that ended December 10 was revised up by 3,000 from 211,000.

"On balance," Vanden Houten said, "the claims data are consistent with a labor market that is still too tight for the Fed and leave the Fed on track to raise rates further in 2023 after last week's 50 [basis point] rate hike."

By Heather Rydings, Alliance News senior economics reporter

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