Will Lower GDP Figure Put FOMC On Hold?

By John S. McClenahen The U.S. Commerce Department Aug. 27 said that GDP growth during this year's second calendar quarter was at an annual rate of 2.8%, two-tenths of a percentage point less than the 3% rate it reported about a month ago. A deeper U.S. trade deficit was a major factor behind the slowdown in growth. A downward revision was widely expected, although the latest number is not as low as the 2.6% that UBS Investment Research was anticipating or the 2.5% that Merrill Lynch & Co. had projected. During this year's first quarter GDP advanced at a 4.5% annual rate. The issue now is whether the second-quarter slowdown and subsequent oil-price hikes will cause the Federal Open Market Committee (FOMC) to leave short-term interest rates alone at its next scheduled meeting on Sept. 21. The influential federal funds target rate is now at 1.5% and an increase in September would be the third of this year. However, unless there is some dramatic development between now and Sept. 21 that would make such a move economically unwise, chances are that the FOMC will increase the target by another 25 basis points to 1.75% as its process of "measured" monetary adjustment continues.

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