We have Fed lift-off? Not so fast

This week, the U.S. Federal Reserve was widely expected to leave interest rates unchanged at the conclusion of its meeting. While market-based estimates of Fed lift-off point to low odds of a rate increase this year, we, along with many economists, expect the Fed to raise rates at its December meeting. The key will be for economic data to generally improve.

A contributing factor would be rising wages in this week’s third quarter Employment Cost Index report. Beyond this week, we would look to an uptick in inflation data next month and solid employment reports for October and November.

The U.S. political front also remains an important factor in Fed lift-off. If Congress fails to lift the debt ceiling and fund the government in a timely manner, market dislocation could delay lift-off. We believe the likelihood is low that the U.S. government will fail to raise the debt ceiling or pass a budget.

Easy monetary policy continues to be the main feature of the rebound in the global equity markets. European Central Bank President Mario Draghi indicated the central bank is likely to expand its quantitative easing program in December. Also, ahead of this week’s annual central party meeting, authorities in China reduced interest rates to support economic activity.

For more information, please go to: https://reserve.usbank.com/insights/market-economic-update.

Robert L. Haworth, CFA, is a senior investment strategist and Darrell Behnke is the Madison market leader for the Private Client Reserve of U.S. Bank.

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