Strong GDP Growth Virtually Guarantees Fed Continues Aggressive Rate Hikes — Don’s Daily Brief

by | Jan 26, 2023

GDP came out this morning at 2.9% for the fourth quarter.

That’s the second quarter in a row of pretty strong growth out of the US economy.

It was 3.9% or so the quarter before — and that’s on the back of negative growth the first two quarters of the year.

Now, all of that is in the face of the most aggressive Federal Reserve tightening campaign in history, I believe.

So that makes you wonder…

A few months ago I pointed out the fact that during Quantitative Easing — all the last 10 years — the excess money that the Federal Reserve printed built up on banks balance sheets.

It just sat there as excess reserves — it didn’t get lent out. It was a sum total of $4 trillion out of the total $9 trillion that was created during that time frame.

That started decline when the Fed started to tighten with their Quantitative Tightening campaign.

And my theory some months ago was that that tightening campaign would scare that money out…

Would scare that money into circulation because they’re not tightening nearly fast enough to take that money out of the system anytime soon.

Banks are now lending — people are more desperate to borrow money.

Companies and individuals are more desperate to borrow money before rates get too high.

That’s pulling money into the system and it’s creating more inflation in and of itself… sort of a paradox that I pointed out.

Well, I think that one might be happening. I think that’s an explanation for this higher than expected GDP growth.

Now, a lot of people have baked into the cake a recession — now it’s pushed back towards the second half of the year.

You know, I don’t really want to make some guesses on that, but I do think the Fed is going to be very aggressive.

I do think there’s a chance that they may raise 50 basis points next week.

And even if they don’t, Powell will very much come out with very aggressive statements after the meeting to put the market on guard.

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