Inflation, Interest Rates Put a Dent in Economic Growth

GDP rose by a weaker-than-expected 1.1% in latest quarter
By Newser Editors and Wire Services
Posted Apr 27, 2023 8:00 AM CDT
US Economic Growth Is Weaker Than Expected
A steel worker inspects a 155 mm M795 artillery projectile during the manufacturing process at the Scranton Army Ammunition Plant in Scranton, Pennsylvania, Thursday, April 13, 2023.   (AP Photo/Matt Rourke, File)

The US economy slowed sharply from January through March, decelerating to just a 1.1% annual pace as higher interest rates hammered the housing market and businesses reduced inventories. Thursday’s estimate from the Commerce Department showed that the nation’s gross domestic product—the broadest gauge of economic output—weakened after growing 3.2% from July through September and 2.6% from October through November, per the AP. The slowdown reflects the impact of the Federal Reserve’s aggressive drive to tame inflation, with nine interest rate hikes over the past year. Economists predicted growth of 2% in the quarter, per CNBC.

Though inflation has steadily eased from the four-decade high it reached last year, it remains far above the Fed’s 2% target. The housing market, which is especially vulnerable to higher loan rates, has been battered. Consumer spending, which fuels roughly 70% of the entire economy, has softened. And many banks have tightened their lending standards since the failure last month of two major US banks, making it even harder to borrow to buy a house, a car, or to expand a business. Still, markets seemed little fazed by the GDP report, with the Dow on track to open with a gain of more than 100 points on better-than-expected results from Meta.

Many economists say the cumulative impact of the Fed’s rate hikes has yet to be fully felt. Yet the central bank’s policymakers are aiming for a so-called soft landing: Cooling growth enough to curb inflation yet not so much as to send the world’s largest economy tumbling into a recession. There is widespread skepticism that the Fed will succeed. An economic model used by the Conference Board, a business research group, puts the probability of a US recession over the next year at 99%.

(More GDP stories.)

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