US GDP Quick Analysis: Dovish hike coming? Goldilocks growth to get markets excited

Recession talk is premature – but expectations for rate cuts in 2023 have gained traction. Gross Domestic Product (GDP) figures for the fourth quarter pointed to a slower expansion than in the third quarter. Moreover, the Price Index component – aka the "deflator" points to a considerable slowdown in price pressures. 

While the decelerating activity may worry the broader public, the figures are "Goldilocks" for markets – not too hot, nor too cold. An economy that is growing at a rapid clip needs cooling down from the Federal Reserve (Fed), and investors dislike interest rate increases. Conversely, signs of an imminent recession are also worrisome – company earnings are hurt. 

The middle is the best, but what exactly will the Fed do? Policymakers are set to move forward with raising borrowing costs by 25 bps. Bond markets are have been pricing the move for weeks, and officials have not pushed back. Fed Chair Jerome Powell and his colleagues prefer signaling moves in advance and avoiding surprises. 

The question is: what's next? The statistics point to either a pause announcement a la the Bank of Canada (BOC), or guidance toward a final rate increase in March and a pause afterward. As markets are forward-looking and tend to exaggerate, any sign of stopping to raise rates will trigger hopes of outright rate cuts coming later on. 

Will the Fed indicate lower borrowing costs? Probably not next week, but that is unlikely to stop markets from remaining hopeful.

For the US Dollar, the data and their perception by investors imply weakness. The US economy is weak enough for looser monetary policy, but strong enough to carry the world forward – obviating the need for a rush to the Greenback as a safe haven. The Dollar Smile theory is alive and kicking.