“Full Potential” Has Been Achieved, What Comes After That?

Today’s 3rd Quarter US GDP report showed a 3.3% expansion. This is the strongest in 3 years and indicated that total economic output was near the “maximum sustainable output” as determined by the Congressional Budget Office, for the first time in 10 years. This means there (finally) should be very little slack in the labor and purchased goods markets, which should lead to inflation. Fed Chair Yellen’s testimony today had some interesting comments about inflation. She said that the Fed is committing to gradually raise rates even in a low inflation environment to avoid a “boom-bust condition”. She mentioned moving from “accommodative” policy to a more “neutral” policy (that means moving the Fed Funds rate, now 1.25% closer to the stated neutral rate of 2.75%). This indicates a Fed still feeling as if some of the factors holding prices down are “transitory”. The 10 year T hit 2.39% today (after dropping to 2.31% earlier in the week). High sales figures for Black Friday and progress with the Tax Bill are also pushing yields up. Stay tuned. By David R. Pascale, Jr. , Senior Vice President at George Smith Partners