'Goldilocks' GDP growth eases worries over interest rates

The first reading on U.S. gross domestic product (GDP) in the second quarter matched expectations, easing worries that faster-than-anticipated economic growth would give the Federal Reserve more reason to accelerate interest-rate hikes.

The Commerce Department announced on Friday that second-quarter GDP grew by 4.1%, the strongest pace in nearly four years. Economic growth in the first quarter was revised to 2.2%, up from the previous estimate of 2%. Consumer spending, as well as an increase in soybean exports to China, helped drive GDP growth during the most recent quarter.

Cliff Hodge, director of investments for Cornerstone Wealth, characterized second-quarter GDP as a “Goldilocks” number – not too cold, but also not hot enough to spook investors wary of higher interest rates.

Growth of 4.1% “is a Goldilocks number that was driven by a strong consumer, with sales to private domestic purchasers growing at 4.3%, above expectations of 3%,” Hodge said in an email. “More importantly, this number will allow flexibility for the Fed to ‘stay the course’ on monetary policy.”

Fed policymakers have raised interest rates twice this year, and they expect two more hikes before the end of 2018 in response to higher inflation and a strong labor market. Some officials at the central bank have suggested raising rates at a quicker pace to prevent the economy from “overheating,” when prolonged growth causes inflation to spike.

Hodge said he expects the Fed to increase short-term interest rates in September, adding that officials will “have the luxury of more data” before deciding whether a fourth rate hike is warranted.

“A GDP number in the 5s would have likely forced their hand,” he said. “This is a win for the [Trump] administration and a win for the markets.”

For the full year, the Fed forecasts GDP to climb 2.8%. The central bank sees growth of 2.4% in 2019.

“It looks like this year, we’re going to come really close to about 3% growth when all is said and done, if this trend continues,” JPMorgan Chase Chief Economist Anthony Chan said during an interview on FOX Business’ “Mornings with Maria.”

Chan added that “confidence on the part of the consumers is what drives this economic growth.”