Key Points

  • Data released by the U.S. Commerce Department on Thursday showed thatthe economy grew at an annualized rate of 3% in the second quarter, higher than market expectations. Minutes after the data release, a Federal Reserve governor warned that the central bank's decision last week to cut interest rates by 50 basis points could stimulate demand and reignite inflation.
  • GDP growth accelerated compared to the 1.6% annualized rate in the first quarter. According toforecasts from the Atlanta Fed, third-quarter GDP could grow at an annualized rate of 2.9%.
  • "There is still a large amount of pent-up demand and cash on the sidelines in the market, ready to be deployed as the interest rate path declines,"said Federal Reserve Governor Michelle Bowman. "Lowering policy rates too quickly could release this pent-up demand," she said, advocating for gradual rate cuts to "avoid unnecessarily stimulating demand and potentially reigniting inflationary pressures."

In-Depth Analysis

Bowman was the only policymaker to dissent when the central bank decided on September 18 to lower its key interest rate to a range of 4.75% to 5%.

Officials supporting easingcited progress in inflation falling from over 9% two years ago toward the Fed's 2% target, as well as a softening labor market and downside risks to the economy.

Bowman supported a 25-basis-point cut in the federal funds rate and said in a speech on Thursday that "restoring price stability is essential for achieving maximum employment," the other half of the Fed's dual mandate.

Other members of the Federal Open Market Committee have recently expressed greater confidence than Bowman that inflation is moving sustainably toward the 2% target.

"I strongly support last week's decision, and if inflation progress continues as I expect, I will support further cuts to the federal funds rate in the future," said Federal Reserve Governor Adriana Kuglerin a speech on Wednesday。

"The labor market remains resilient, but the FOMC now needs to balance its focus so that we can continue to make progress on disinflation while avoiding unnecessary pain and weakness in the economy, as disinflation is on the right track," Kugler said.

With the labor market cooling and unemployment remaining relatively low, some economists and Wall Street analysts believe the Fed is steering the economy toward a "soft landing," slowing inflation while avoiding widespread job losses and a recession.

"What is unfolding before our eyes appears to be a soft-landing scenario that only the most optimistic could have dreamed of," Greg Daco, chief economist at EY, said in an email on Thursday, highlighting positive signals in the GDP data.

"Overall, this latest snapshot of the U.S. economy is reassuring, showing corporate profits near record highs at 13.2% of GDP, and strong momentum in real household disposable income, up 3.1% year-over-year, despite a cooling labor market," Daco said.

"Robust productivity growth remains a key pillar of the U.S. economy's outperformance, while consumer caution in the face of high prices continues to drive disinflation," he said.

Daco expects the economy to grow 2.7% this year and 1.8% in 2025, as slowing inflation, falling interest rates, and a looser labor market support more sustainable economic growth.

He said the Fed could cut interest rates by 25 basis points at each policy meeting through June 2025, bringing the benchmark rate down to 3.4%. However, Daco noted that a rapid rise in the unemployment rate toward 4.5% could prompt Fed Chair Jerome Powell to call for another 50-basis-point cut at the FOMC meeting on November 6-7.