Fed more confident despite softer start to 2017

The Fed’s decision to hike interest rates by 25bp last week may initially seem a little hard to square with the apparent weakening in the economic data since the start of the year, with the Atlanta Fed’s first-quarter GDP tracker having fallen below 1% annualised. Nonetheless, Fed officials may have been comforted by the improvement in financial conditions and, in particular, the marked strengthening of the survey evidence in recent months. The latter is a key reason why, despite the subdued start to the year, we still expect GDP growth to pick up to 2.3% this year. Meanwhile, one of the main stories from February’s employment report was the turnaround in employment growth in the three main goods-producing sectors of mining, manufacturing and construction. With these sectors all paying above-average wages, a continued recovery in goodssector hiring should not only support overall payroll employment, but may also help drive a further acceleration in average hourly earnings growth.