Will the Fed end its zero interest rate policy soon?

The July employment report was mostly in line with consensus expectations and provided some support to our notion that the Federal Reserve will end the zero interest rate policy in September.

Nonfarm payrolls rose by 215,000 in July, the unemployment rate was unchanged at 5.3%, and average hourly earnings rose 0.2% for the month and more than 2% over the past year. Wage growth doesn’t seem to be accelerating, but gains are staying ahead of inflation, which should benefit consumer spending. Data on consumer spending for the second quarter showed that growth remains modest, with some indication that consumers continue to focus on managing their balance sheet rather than maximizing spending. This combined with solid but unspectacular Purchasing Manager Index (PMI) reports for July indicate to us that the economy continues to “trundle” along at a modest growth rate of 2.5% for 2015.

Global PMI reports remain consistent with solid, though not accelerating, global economic growth. Data for developed economies, such as the United States, Europe, and Japan indicate growth in business activity is likely to continue to “soldier on” at a modest pace. Data for emerging market economies is mixed with continuing recessions in Russia and Brazil, slowing activity in China, Taiwan, South Korea, Malaysia, and Indonesia, and growth in India, Mexico, and Vietnam. Easy monetary policy in Europe, Japan, and several emerging market economies are likely to support slow but positive global economic growth.

Risks from Greece and China remain an issue, but appear to be on the back burner for markets at this time. Negotiations for a new debt deal in Greece seem to be making progress ahead of the August 20 deadline, when Greece must repay €3.2 billion in debt to the European Central Bank. China has engaged in further support for its stock markets. For now, prices have arrested their decline, although a large percentage of stocks are not yet trading actively.

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.

This information represents the opinion of U.S. Bank and is not intended to be a forecast of future events or guarantee of future results. It is not intended to provide specific advice or to be construed as an offering of securities or recommendation to invest. Not for use as a primary basis of investment decisions. Not to be construed to meet the needs of any particular investor. Not a representation or solicitation or an offer to sell/buy any security. Investors should consult with their investment professional for advice concerning their particular situation. The factual information provided has been obtained from sources believed to be reliable, but is not guaranteed as to accuracy or completeness. The organizations mentioned in this publication are not affiliates or associated with U.S. Bank in any way.

Past performance is no guarantee of future results. All performance data, while deemed obtained from reliable sources, are not guaranteed for accuracy. Indexes shown are unmanaged and are not available for investment.

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