U.S. GDP Gives Fed Inflation Glimmer it Needs

Second-quarter GDP data showed the economy is still growing at a ho-hum pace, but inside the report was a slight pickup in a quarterly inflation that could help the Fed move toward a rate hike.

Second-quarter GDP grew at a 2.3 percent pace, lower than the 2.5 percent or even more expected by economists. But some traders quickly focused on the 1.8 percent quarter-to-quarter gain in the core PCE deflator, the Fed’s preferred inflation gauge. The short end of the Treasury curve sold off with yields on two-year through five-year Treasury notes moving higher.

“There’s a movement in the right direction. They’re (the Fed) only edging toward liftoff, and they only need the data to edge, as well,” said Mesirow Financial chief economist Diane Swonk. Swonk, like many economists, expects a September rate hike and said the Fed will need to see continued strong employment reports before that, in order to raise rates.