The entire financial community waited to see how the Fed would communicate its decision at its March meeting. Make no mistake, challenges existed.
On the one hand, the Fed had to account for better than expected GDP growth. This is bullish for the dollar and should trigger a hawkish response. Also, the Fed had to account for higher inflation – this is also bullish for the dollar because the Fed should respond with a hawkish move.
On the other hand, the Fed did not want to tighten too early. How to combine the two without sending a confusing message?
If there is one area the Fed got it right, that is the economic growth. The Fed’s projections see the American GDP growing faster than expected, on the back of a terrific vaccination campaign that leads to a pick-up in the economic activity.
What Triggered the Fed’s Upgrade of the GDP?
The Fed is right in upgrading its forecast. If we look back only at recent economic data, it all points to further recovery and continued growth.
Let’s start with vaccination against the COVID-19 virus. The U.S. is on track to have 50% of the population over 15-year old vaccinated by the end of June. This alone is the trigger for faster than expected economic growth, and, as Jerome Powell put it at Wednesday’s press conference, the economic data should only improve from this moment on.
Retail Sales continue their strong trend, despite a small bump in the road in February. However, the data for January was revised higher, and the warmer weather expected in the months ahead and the new stimulus checks received by American households should lead to more spending and higher GDP.
Can Europe Be a Drag on the U.S. Economic Growth?
Fed’s Powell had to answer an interesting question during Wednesday’s presser. That is – will Europe’s mess in dealing with the COVID-19 pandemic slowdown the U.S. growth?
Truth be said, studies have shown that Europe will not reach its pre-crisis level one year from now. In the meantime, the U.S. upgrades its economic forecast and is leading global economic growth. Powell’s answer pointed out exactly that – the U.S. leads the global recovery, and Europe can only benefit and will not be a drag.
No matter how you put it, the U.S. did it again. Just like it did after the 2008-2009 Great Financial Crisis, it recovered much faster than Europe and other parts of the world. One should not be surprised to see the Fed raising its economic growth forecast again later this year.