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Fed meeting overshadowed by GDP disappointment

January 31, 2013

| MoneyRates.com Senior Financial Analyst, CFA

There was no shortage of economic news yesterday, between the Federal Reserve meeting and the first report on fourth-quarter Gross Domestic Product (GDP). Unfortunately, neither painted a pretty picture.

The U.S. Bureau of Economic Analysis (BEA) announced yesterday that its advance estimate showed real GDP shrinking at an annual rate of 0.1 percent in the fourth quarter. This news overshadowed the Fed meeting, at which the Fed reiterated its commitment to keeping interest rates down until unemployment improves significantly.

Does this mean interest rates on savings accounts and other deposits are doomed to another weak year in 2013? On first glance, this seems yet another setback for the economy, and by extension for savings accounts. But there are reasons to believe things might not be all that bleak despite this poor showing for the economy.

The shrinking economy

The BEA estimate means that it appears that the U.S. economy produced less in the fourth quarter of 2012 than it did in the third quarter, after accounting for the impact of inflation. While a decline in GDP at an annual rate of 0.1 percent is very slight, it is a major disappointment after real GDP had achieved a 3.1 percent growth rate in the third quarter. As has happened repeatedly since the Great Recession, just when the economy seems to be gaining momentum, it slips right back again.

As a result, real GDP growth now appears to have been just 2.2 percent in 2012. This is a slight improvement over 2011's 1.8 percent, but still a pretty lackluster rate of growth.

A couple of grains of salt

Still, there are reasons not to make too much of the latest GDP setback:

  1. This is only an advance estimate, which out of necessity is based on preliminary and often incomplete information. There is usually a significant variance between the advance estimate and the second estimate, which will be released on February 28.
  2. The fourth quarter was spend in the shadow of uncertainty -- first uncertainty about the election, and then uncertainty about the fiscal cliff. Uncertainty tends to paralyze economic activity, so a truer test of the economy's strength should come now that those uncertainties have been resolved.

The fourth quarter GDP figure was disappointing, but the direction of interest rates in 2013 will depend more on what happens next than on what has already happened.

Looking ahead

The next key development will come on February 1, when the Bureau of Labor Statistics will release employment data for January. Job growth remains the key to lifting the economy, and eventually, interest rates.

Even if GDP had been a positive surprise, it's unlikely the Fed meeting would have gone any differently. The Fed's commitment to keep the federal funds rate low until unemployment improves significantly -- it has mentioned 6.5 percent as a threshold figure -- means that low interest rates are likely to remain regardless of any upward revisions in fourth-quarter growth.

So if you've been hoping for higher deposit rates, it may be wise to watch the unemployment rate more closely than GDP.

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