Nominal Spending Remains Hot: Monetary Policy Not As Restrictive As Fed Thinks It Is

Monetary policy impacts the growth of nominal spending in the economy. Therefore, the preliminary Q1 GDP results send a strong message to policymakers that prior increases in official rates have not resulted in the spending slowdown they expected. In other words, monetary policy is more relaxed than they think. 

In Q1, nominal GDP rose at an annualized rate of 4.8%, slightly below the 5.1% increase in Q4 2023. Yet, a slower pace of inventory investment accounted for the slowdown. Final sales to domestic purchasers increased at an annual rate of 5.9%, while final sales to private domestic purchasers increased by 6.1%. That latter is the fastest increase since Q1 2023.

The Fed's last rate increase occurred in July 2023, and since then, the pace of nominal aggregate spending has accelerated, and the rate of growth remains above the level of the Fed federal funds rate. History shows that spending slowdowns occur when official rates are above the growth rate in nominal spending, not below. The latter does not necessarily suggest that the next move in official rates is up, but it should end the talk of a rate cut anytime soon.