Axios Macro

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September 19, 2022

Welcome to Fed week! At a two-day meeting that concludes Wednesday, the central bank will likely announce a supersized interest rate increase of 0.75 percentage points. However, it could consider surprising the markets with a full-percentage point rate hike, which would be the biggest in modern times.

  • In today's edition, we'll take a look at why the economy's slowdown leading up to the Fed's big meeting is a good sign for the high-stakes battle against inflation. Plus, get ready to hear a lot about housing this week. 🏠🏡

Today's newsletter, edited by Kate Marino and copy edited by Katie Lewis, is 595 words, a 2-minute read.

1 big thing: GDP is growing slowly, and that's a good thing

Dollar sign growing out of a plant
Illustration: Lazaro Gamio/Axios

After back-to-back quarters of GDP contracting, estimates so far point to an economy that is growing again — but slowly.

Why it matters: With inflation soaring and the job market red-hot, the Federal Reserve is trying to engineer a sustained period of slower economic growth that, in theory, should ease price pressures.

  • The early evidence for Q3 — which ends in 11 days — is that this slower-but-positive growth is occurring.
  • The open question for the Fed, as it heads into a policy meeting that concludes Wednesday, is whether that slowdown is enough to get the job done on fighting inflation or if the central bank will tilt toward even more aggressive rate increases.

What's new: The latest reading of the Atlanta Fed's "GDPNow" forecasting model shows the economy expanding moderately in the current quarter.

  • That estimate can swing wildly as data evolves. On Thursday, it dropped to an annualized 0.5% from 1.3%. That's due, in part, to a soft reading of the retail sales "control group" that feeds into GDP calculations.
  • Other economists trimmed expectations for growth: On Friday, Bank of America, for instance, nudged its Q3 GDP tracker down by 0.3 percentage points to 0.8%.
  • "Activity appears to be rebounding in the second half of the year off its first-half decline, but not by much," economists at Bank of America wrote Friday.

What they're saying: The economy is weakening, but core inflation still sped up to 6.3% in August from the prior year. This dynamic may cause Fed officials to worry that inflation is becoming more embedded than they thought, says James Knightley, an economist at ING.

  • "The conclusion might then be that they need to raise rates even higher to generate an even sharper slowdown," Knightley tells Axios.

Of note: What is helping buoy economists' expectations is a reversal of trends that pulled down growth in the first half of this year. Those components that were a major headwind to growth, including trade, appear set to act as a tailwind.

  • The trade deficit shrank dramatically in July to $71 billion, $10 billion less than the prior month.

What's next: For the first time since June, the Fed will issue new economic projections on Wednesday. Look for them to show higher expected interest rates and more of a rise in unemployment than had been the forecast in early summer.

  • "The Fed will remain hawkish until either inflation comes back under control or until the labor market deteriorates significantly, neither of which is on the horizon at the moment," said Roberto Perli, head of global policy research at Piper Sandler, in a note to clients.

2. Big week for housing data

Illustration of a real estate sale sign shaped like a downward point arrow
Illustration: Annelise Capossela/Axios

One notable part of the last GDP report was the sharp drop-off in the housing component of the report, known as residential fixed investment. And that was before the staggering rise in mortgage rates that has recently blunted activity.

  • This week will offer the latest snapshot of the cooling housing sector, including new data on building permits and housing starts tomorrow and existing home sales on Wednesday.

First out of the gate is a closely watched survey of homebuilder sentiment, released this morning.

  • The National Association of Home Builders/Wells Fargo Housing Market index dipped three points to 46 in September. A reading below 50 indicates that more builders assess conditions as poor.

What they're saying: "Buyer traffic is weak in many markets as more consumers remain on the sidelines due to high mortgage rates and home prices that are putting a new home purchase out of financial reach for many households," NAHB chairman Jerry Konter said in a release.