From Interest Rate to GDP; A Lovely Road toward an Unpleasant Destination

It is almost certain that the FOMC will lower interest rate today, but what would happen after that?

 

Regardless of what the Fed will do today, I think the market will finally turn its focus toward the GDP and may be more importantly the Personal Consumption; both are to be released as early as tomorrow. The third quarter GDP is expected to show the first contraction since the 2001 recession while the Personal Consumption, the most important driving part of the economy, may show the first decline since 1991.

 

It is important to keep in mind that the figures will reflect the economic activity even before the credit crisis start to intensify from the late September. Since then, central bankers around the world tried to thaw the frozen credit market by reducing their benchmark interest rates; either in coordinated or scheduled meeting.

 

So it may help to see the today's rate cut (if it happens at all) in this context and also remember that the consumer sector is the least responsive component to changes in interest rates. It means that such attempts at best can help to reduce the negative impacts, unemployment specifically, from other sectors on the overall economy.

 

Based on this analysis, I expect that any positive effect from a possible rate cut will finally start to fade as the market find itself closer and closer the GDP numbers.