Nominal GDP Running At Its Fastest Rate Since Mid-1980s---Fed Funds & Market Rates Still Too Low
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Monetary policy influences nominal spending in the economy. In the third quarter, nominal GDP grew 8.6% annualized. So far, in 2023, nominal GDP is running at an annualized pace of 6%. That follows a 10.6% gain in 2021 and a 9.1% gain in 2022. The three-year increase, 2021 to 2023, represents the fastest three-year advance in nominal GDP since the mid-1980s.
The economy's nominal growth performance has two critical messages/implications for policymakers and analysts/portfolio managers regarding Fed policy and market rates.
First, except for the non-economic slowdown following the pandemic, it has taken a Fed funds rate equal to or above the growth in nominal GDP to engineer a sustained growth slowdown/recession. The target on the Fed Funds rate is still 75 basis points below the growth in nominal GDP.
Second, many analysts and portfolio managers still expect a return soon to the interest rate pattern of 2008 to 2020. Yet, that interest rate pattern was abnormal, as was the nominal growth path in the economy. Only once did nominal GDP grow more than 5% during those twelve years, which occurred in 2018. The average gain was about 4%.
The interest rate pattern more applicable to the economy's current growth performance and policymakers' intent to lower inflation is from the mid-1980s to the mid-1990s. At the start of that period, the Fed funds rate, as did the 10-year Treasury yield, exceeded the Nominal GDP growth. Then, in the later part, nominal growth and nominal rates were more in line with one another.
The longer it takes the Fed to adjust policy to the current growth dynamics, the longer it will be before the economy slows and market rates fall.
Joseph G. Carson
AuthorMore in Author Profile »Joseph G. Carson, Former Director of Global Economic Research, Alliance Bernstein. Joseph G. Carson joined Alliance Bernstein in 2001. He oversaw the Economic Analysis team for Alliance Bernstein Fixed Income and has primary responsibility for the economic and interest-rate analysis of the US. Previously, Carson was chief economist of the Americas for UBS Warburg, where he was primarily responsible for forecasting the US economy and interest rates. From 1996 to 1999, he was chief US economist at Deutsche Bank. While there, Carson was named to the Institutional Investor All-Star Team for Fixed Income and ranked as one of Best Analysts and Economists by The Global Investor Fixed Income Survey. He began his professional career in 1977 as a staff economist for the chief economist’s office in the US Department of Commerce, where he was designated the department’s representative at the Council on Wage and Price Stability during President Carter’s voluntary wage and price guidelines program. In 1979, Carson joined General Motors as an analyst. He held a variety of roles at GM, including chief forecaster for North America and chief analyst in charge of production recommendations for the Truck Group. From 1981 to 1986, Carson served as vice president and senior economist for the Capital Markets Economics Group at Merrill Lynch. In 1986, he joined Chemical Bank; he later became its chief economist. From 1992 to 1996, Carson served as chief economist at Dean Witter, where he sat on the investment-policy and stock-selection committees. He received his BA and MA from Youngstown State University and did his PhD coursework at George Washington University. Honorary Doctorate Degree, Business Administration Youngstown State University 2016. Location: New York.
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