The Fed Tapers While GDP Surges

It has been a big week of news so far, with this morning’s second-quarter gross domestic product (GDP) print showing the economy grew some 4% from April through June. That number was a welcome relief from the revised contraction of 2.1% in the winter-ravished first quarter.

The economy now seems on pace to deliver GDP growth of about 2%, which is not fantastic, but not bad either. I think what today’s GDP print tells us is that the Federal Reserve will almost certainly continue the taper of its bond-buying program. The Fed also will likely stay the course, depending on the data, and raise interest rates sometime in mid-2015.

That’s essentially the path the Fed took in its latest Federal Open Market Committee (FOMC) meeting. The central bank continued to taper its asset purchases by $10 billion per month, as expected, and it also left short-term interest rates alone at near-zero. The Fed’s statement contained language that acknowledged prices were climbing to their 2% inflation target. It also acknowledged improved economic conditions and an improving labor market.

We’ll soon know just how well the labor market did in July, as the official employment data comes out on Friday morning. I suspect that the number will reflect what we’ve seen of late, and that is a moderate-but-steady improvement on the jobs front.

The bottom line here is that the market has some positive data to support current equity levels. Now, however, we have to see if this is as high as things are going to get for a while — or whether we are in for a “sell-the-good-news” pullback that shakes things up.