Hotter-than-expected first quarter growth is likely to revive the debate within the Fed about the direction of policy.
Hotter-than-expected first quarter growth is likely to revive the debate within the Federal Reserve about the direction of policy, but Fed officials are likely to be content to stay on the sidelines for now, particularly with inflation so low.
"It's going to be tough for them to start their engine. It's partly economics. It's partly low inflation. The puzzle is why strong growth doesn't lead to more inflation.That's part of it. The other part of it is the political winds are very unfavorable to rate hikes right now," said Chris Rupkey, chief financial economist at MUFG.
Treasury yields initially jumped on the GDP report, as investors sold, but the fact that inflation looked weaker and the fact transitory factors of inventories and trade boosted growth dampened some of the enthusiasm. Bonds quickly reversed and prices were bid higher. Yields, which move opposite price, moved lower with the 2-year touching 2.26%.
"So much for the perpetual pessimism. You've got a contribution from a lot of things. The consumer only contributed 0.8 to growth and the consumer spending is on the upswing headed into q2, so that's a good thing," said McCarthy. Mark Cabana, head of U.S. short rate strategy at Bank of America Merrill Lynch, said there is a risk the market is expected too much dovishness from the Fed chairman.
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