Nothing Can Stop The U.S Economy(?)

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steemychicken14.4 K12 hours ago3 min read

The U.S economy seems it cannot be stopped!
So let’s talk about two very important pieces of news: U.S. GDP and new jobless claims. Both came in much stronger than expected, leaving investors, analysts, and… the Fed with mixed feelings.

Yes, on the surface this is good news—but not necessarily for inflation. Nor for interest rates.

GDP

Let’s start with GDP. In the second quarter, the U.S. economy grew at an annualized rate of 3.8%, well above the initial estimate of 3.3%—and much stronger than the meager 0.5% growth recorded in the first quarter.

According to the Commerce Department, the upward revision was driven primarily by stronger consumer spending. In short, people are still spending—and spending a lot. Since private consumption makes up roughly two-thirds of U.S. GDP, that’s the key growth engine.

On top of that, the PCE price index was revised higher to 2.1%, while Core PCE came in at 2.6%. That’s some progress, but inflation still sits above the Fed’s 2% target.

And here comes the first contradiction: with rates this high, how is it that consumers are still spending as if nothing has changed?

Maybe interest rates haven’t hit the economy as hard as we thought. Or maybe they have, but not enough to bring inflation down to where the Fed wants it.

Unemployment

Now to unemployment. For the week ending September 20, new jobless claims came in at just 218,000, far below analysts’ expectations of 235,000.

That basically means companies aren’t laying people off. Sure, hiring may have slowed, but even so, employers are holding on to staff. This shows the labor market remains very strong—something that gives the Fed headaches.

Meanwhile, continuing claims—those filing for unemployment for more than one week—held nearly unchanged at 1.926 million. In other words, people who lose their jobs are finding new ones quickly. Demand for labor is still high.

And, as strange as it sounds, that’s not great news for inflation. The more people are employed, the more income circulates in the economy—and the harder it becomes to bring prices down.

What Will the Fed Do?

Here’s the big question: what will the Fed do next? Until just a few days ago, the path seemed clear: the economy was slowing, unemployment was rising, inflation was cooling—so the Fed could keep cutting rates.

In fact, at its latest meeting on September 17, the Federal Reserve cut its benchmark rate by 25 basis points, to a range of 4%–4.25%—its first cut of 2025.

But now, with this new data, the outlook is far less certain. On one hand, GDP growth is running at 3.8% and the labor market is tighter than the Fed would like. On the other, interest rates are already high for businesses and households, and inflation is still above target.

If the Fed keeps cutting, there’s a risk inflation will reignite. But if it pauses, markets may be disappointed.

So, we simply don’t know what the Fed will do. The narrative has become muddled—hence the volatility we’re seeing in markets.

According to the FedWatch Tool, the probability of another rate cut has already dropped to 87.7%, down from 91.9% just the previous day.