Disconnected! Corporate profits and GDP growth…

The view of the Fed based on Gross Domestic Product (GDP) growth is that we are edging up toward 3.9%, and that is good enough for a rate hike: article.

The view of investors based on corporate profits is that they are likely to be down 3.9% (yes the number is exactly the same but in the opposite direction) for the 3rd quarter, and down 2% a year from now: article.

That means investors will invest less (due to lower expected returns), and ultimately less “GDP” will be produced.

It means corporations and investors will be able to borrow less to finance production because of the Fed policy (assuming the rate increase happens), and for a second reason less GDP will be produced.

No one in their right mind (other than a CEO) would suggest the Fed act in such a way as to maximize corporate profits.  However, they could act in such a way as to maximize employment, and this would have the effect of postponing the rate increase until such a time that the investment in future GDP (and thus future employment) were not declining.  Which would be something an economist in their right mind might do.  But of course economists can never decide.

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