In Q1, GDP growth was 1.6%, below projections

The economy expanded at a 1.6% seasonally adjusted annual rate in the first quarter of this year, showing some underlying momentum despite high interest rates from the Federal Reserve.

The new figures, which are adjusted for inflation, were published Thursday by the Bureau of Economic Analysis in its report for gross domestic product. Economists had expected GDP growth to increase by 2.5%, so the reading is worse than anticipated.

Thursday’s report is the first of three estiamtes that will be made over the coming months as analysts get a better picture of how the economy performed during the third quarter.

The new first quarter numbers mark a slowdown from the preceding quarter. GDP growth in the fourth quarter came in at a 3.4% seasonally adjusted annual rate, showing the economy ended 2023 on stronger footing than previously realized.

Additionally, the economy expanded a healthy 2.5% for all of 2023.

The Federal Reserve hiked interest rates to multi-year highs in response to the country’s too-high inflation. Higher rates typically cause economic output to dampen and can cause GDP to crater. The positive GDP numbers have given the Fed some ammunition to keep rates higher for longer.

Also giving the Fed confidence to maintain its higher interest rate posture is the country’s remarkably resilient labor market. For instance, the economy added 236,000 jobs in March, according to the Bureau of Labor Statistics.

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The Fed’s interest rate target is now at 5.25% to 5.50%, a level where it has been since July.

Just a few months ago in December, investors were pricing in up to six downward rate revisions in 2024. Now, investors aren’t expecting a rate cut until the summer, perhaps in September, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.