September data fires up yields, and puts the Fed in a bind

• The central bank always emphasizes that it is data-dependent. But it also aims to be forward-looking, trying to set policy based on where the economy is going rather than where it is today. Right now, those are in tension.
• How the tension is resolved — whether the Fed raises rates again this year and what it signals lies ahead — will determine how 2024's economy will evolve.

By the numbers: The Commerce Department's first estimate of Q3 GDP is due out next Thursday, and it could be a whopper. The Atlanta Fed GDPNow model puts the number at a 5.4% annual rate of growth.

• S&P Global Market Intelligence's GDP tracking number puts it even higher at 5.7%, fueled by surging consumption spending and investment in structures.
• Nobody really believes the economy is growing at a 5%-plus trend; quarterly GDP numbers jump around a lot. But regardless, what is clear is that we aren't seeing below-trend, sub-2% growth that the Fed has been looking for to bring down inflation.
• And so far this month, payroll job growth, the Consumer Price Index and retail sales have all come in hot. On Wednesday morning, the Census Bureau said housing starts surged 7% in September.

Yes, but: That's all backward-looking. The third quarter ended 18 days ago. And the steep run-up in longer-term bond rates over the last couple of months is poised to slow activity heading into 2024.

• And if the Fed reacts to the strong past growth by making newly hawkish noises, it risks making the bond selloff worse, and increases the odds of a hard landing in 2024.

In a speech in London on Wednesday, governor Chris Waller noted that growth and the job market remain strong, while there has been gradual progress in lowering inflation.

• "This is great news, and while I tend to be an optimist, things are looking a little too good to be true, so it makes me think that something's gotta give," Waller said, according to a prepared text.
• "Should the real side of the economy soften, we will have more room to wait on any further rate hikes and let the recent run-up on longer-term rates do some of our work," he added.
• "But if the real economy continues showing underlying strength and inflation appears to stabilize or reaccelerate, more policy tightening is likely needed despite the recent run up in longer term rates," he said.

Other top Fed officials have reacted to this tension by putting greater weight on anecdotes and vibes.

What they're saying: "I remain in the place where I have found myself for the past several months," said Philadelphia Fed president Patrick Harker on Monday.

• "Absent a stark turn in what I see in the data and hear from contacts, and audiences like you, I believe that we are at the point where we can hold rates where they are."

Richmond Fed president Tom Barkin was even more explicit about this tension between the data and his perception of the outlook in a talk Tuesday, appropriately titled "Looking Beyond Recent Data."

• "The data will tell you that demand is not weak. ... The data will also tell you that the labor market is not weak," he said.
• "But I don't like depending solely on data," Barkin added. "It comes in a month late. Then it is revised multiple times. And it is adjusted by seasonal factors distorted by the pandemic."
• "That's why I've made it my priority to be on the ground every week talking to groups like this in the hopes of understanding the economy better. I'm hearing a different message on the ground."

What's next: Fed chair Jerome Powell is speaking Thursday at noon at the Economic Club of New York, giving him the chance to tee up the policy meeting two weeks from now.